Dividend stocks can be excellent options for those seeking to generate passive income. Companies that pay dividends display a commitment to shareholders and tend to have prudent capital management. However, not all dividend stocks are the same.
Some companies offer consistent dividend payments year in and year out, but those payments offer modest yields of 2% or less. Others offer attractive yields that sometimes get into double-digit percentages but there also tends to be a much higher risk that the dividend won't last.
This article will focus on three dividend stocks that yield investors between 9.7% and 17.3% annually. They are B. Riley Financial (RILY 6.14%), Blackstone Secured Lending Fund (BXSL 0.88%), and Ares Capital (ARCC 0.73%). These companies offer some of the highest-yielding dividends you can find, but investors should keep a few things in mind before buying in. I'll also clue you in on which one I'd buy first.
1. B. Riley Financial's lofty 17.3% dividend yield comes with big question marks
B. Riley Financial provides financial services including investment banking, wealth and asset management, business advisory, and asset disposal. The company was a big beneficiary of the blistering investment activity seen in 2021. According to financial analytics firm Refinitiv, dealmaking like initial public offerings (IPOs) and mergers and acquisitions (M&As) was at an all-time high that year. As a result, B. Riley experienced explosive growth, and revenue surged 72% and net income was 118% higher.
B. Riley's revenue dipped last year on tough comps, but it has recovered in recent quarters. However, the company continues to struggle to generate a profit. Over the past 12 months, it has lost $68 million.
RILY Revenue (TTM) data by YCharts
A recent report from short-seller The Friendly Bear adds to its struggles. In the report, the short-seller states that B. Riley "continues to mark an asset at anywhere from 2-3x its fair value" and that the company is "being incredibly misleading in its accounting and in its disclosures around the nature of control it exercises over companies that it invests in."
Investors must be critical of companies they invest in, including reports that are overly bullish or bearish on a company. However, The Friendly Bear report adds fuel to the fire for the already struggling B. Riley Financial. The stock price is down 67% since late 2021 and its dividend yield of 17.3% does not look sustainable based on its current earnings.
Over the last 12 months, B. Riley's dividend per share is $4. Meanwhile, its diluted loss per share over the same period is $2.55. B. Riley's yield is high for a reason, and it needs to see a huge business turnaround to continue making the same dividend payment. If that turnaround doesn't come, a dividend cut is likely.
2. Blackstone Secured Lending Fund invests in underserved companies and sports a 11.2% dividend yield
The Blackstone Secured Lending Fund is a business development corporation (BDC) that invests in private company debt to generate income for dividend-focused investors. BDCs invest in companies primarily through loans, although they also invest in equity positions. These companies get tax treatment similar to real estate investment trusts (REITs) that requires them to pay out 90% of all taxable income to shareholders through dividends or other distributions.
BDCs like the Blackstone Secured Lending Fund invest in middle-market companies that banks have neglected to invest in over recent decades. Increasing regulations and capital requirements have caused banks to pull back funding to this segment of companies, preferring to extend loans to large, established companies at the expense of smaller peers. According to S&P Global Capital IQ LCD, the U.S. banks' share of senior secured loans went from 33% in 1995 to just 8% in 2022.
The fund leverages Blackstone's expansive trove of data on private companies to find attractive opportunities and primarily provides capital in return for secured debt. Secured debt is debt backed by collateral, which helps reduce the risks associated with lending. Most of the fund's debt investments are in first-lien loans (over 98%), meaning it has the first claim to collateral if a company goes under.
Although BDCs are vulnerable to an economic slowdown, nearly all the fund's loans have floating rates and a weighted average yield of 11.9%, making it a solid hedge if inflation and interest rates are persistently high. Additionally, the large composition of first-lien loans has it well positioned even during an economic downturn.
The Blackstone Secured Lending Fund currently yields investors 11.2% annually, paying out $2.17 in dividends per share this year. This dividend is well supported by its earnings per share of $2.77 through the first three quarters of the year. Also, over the last four years, its payout ratio has been around 84%, a high but sustainable ratio for a BDC, making it a solid high-yield dividend stock for income-focused investors.
3. Ares Capital has a 9.7% dividend yield and a longer history as a BDC
Like the Blackstone Secured Lending Fund, Ares Capital is a BDC that invests in middle-market companies through debt and equity investments.
Ares Capital has been around longer than the Blackstone Secured Lending Fund, so investors can better understand how the company performed across different economic environments. Since 2004, Ares Capital has delivered solid returns for patient investors who rode out multiple recessions.
Ares Capital also invests heavily in first-lien and second-lien loans, which make up 43% and 17% of its portfolio, respectively. Additionally, 78% of its loans are floating rate, and its investments have a weighted average yield of around 11.2%, which should support its lofty dividend payout.
Ares Capital yields investors 9.7% annually and has paid out $1.44 in dividends per share this year. The dividend is also well supported by its earnings per share of $2.03 through three quarters of the year. Additionally, over the last five years, Ares Capital's dividend payout ratio was around 83% of its earnings -- making it a quality high-yield dividend stock for investors to consider today.
Final verdict
When analyzing high-yield dividend stocks, it's important to consider the businesses and the companies' histories. B. Riley Financial has a lofty dividend yield, but the business has experienced a dramatic slowdown, and its high payout does not look very sustainable.
For me, it comes down to the two BDCs with more sound business models that better support their high dividend yields. Ares Capital has a more extended history, and investors can take comfort in knowing it has performed well over a long time despite multiple recessions.
However, if I had to pick one today, I would give the Blackstone Secured Lending Fund a slight edge. Although the company has only been around for a few short years, it has significantly more investments in first-lien debt, which could help it hold up slightly better if a deep recession were to occur.
