Does the high interest rate environment we're living in have you feeling down? Here's something to remember that can help you turn that frown upside down.
When the Federal Reserve pushes one door closed, the stock market starts opening windows. Now that big institutional investors can receive more than 5% risk-free from a two-year Treasury note, demand for dividend-paying stocks is lower than it's been in over a decade.
Image source: Getty Images.
Sagging demand for dividend stocks has pushed down their prices, but plenty of them are still generating the profits they need to meet and increase their quarterly payouts. Here are two that offer high yields now, plus a good chance to raise their payouts in the years ahead.
Ares Capital
At recent prices, Ares Capital (ARCC 0.73%) offers a 10% yield. As a business development company (BDC), Ares can avoid paying income taxes as long as it distributes at least 90% of its earnings to investors as a dividend.
This limitation can make distributions a bit unpredictable. Its payout hasn't risen in a straight line, but it is up by 23% over the past five years.
Ares Capital is America's largest BDC. Big banks generally avoid lending to businesses that are too small to have an investment-grade credit rating from one of the bond rating agencies. As a result, heaps of middle-market businesses with between $10 million and $1 billion in annual revenue are starved for capital.
The middle-market companies that Ares lends to are willing to pay relatively high interest rates and are backed by private equity sponsors. The BDC offers a huge 10% yield at recent prices partly because investors are concerned about the ability of its portfolio of companies to keep up with rising interest payments. It usually lends at floating rates, and the average yield on its investments rose to 11% at the end of June, up from 10.5% at the end of 2022.
Concerns about companies in Ares' portfolio buckling under the pressure of higher interest payments seem overblown. At the end of June, just 2.1% of its portfolio was on non-accrual status, compared to 1.7% six months earlier.
AT&T
At recent share prices, AT&T (T 1.02%) offers a 7.7% dividend yield and a pretty good chance to see regular payout raises. The company slashed its payout in 2022 after spinning off the last of its media assets into Warner Bros. Discovery.
AT&T's telecom assets aren't very exciting to write about, but income-seeking investors find the steady growth they're providing absolutely riveting. The company added 251,000 new fiber-internet subscribers in the second quarter, the 14th straight quarter that more than 200,000 new fiber subscribers began making monthly payments.
Many of AT&T's customers have limited options for high-speed internet service -- if they have options at all. Without media assets to soak up steadily growing telecom profits, free cash flow reached $4.2 billion in the second quarter, and management expects $16 billion or more for the full year. This is nearly twice what the company needs to meet its current dividend commitment.
There was $143.3 billion in debt on AT&T's balance sheet at the end of June. That's a heavy load, but steadily growing cash flows from phone and internet subscribers could dramatically lower this figure in the quarters to come.
This might not become the best-performing stock in your portfolio, but it could be one of the most reliable. Scooping up shares while they offer a high yield looks like a smart move right now.
