If you're looking to generate passive income for your portfolio, look no further than dividend stocks. High-yield dividend stocks can be an excellent source of income while you sleep. But they offer another benefit: They tend to outperform the broader market.
According to a recent study by Hartford Funds, in collaboration with Ned Davis Research, analysts found that dividend-paying companies have delivered annualized returns of 9.17%, outperforming the S&P 500 index with less volatility over the past 50 years.
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Companies that pay regular dividends have far outperformed those that haven't. In that same study, Hartford Funds found that non-dividend payers had returned investors just 4.27% annually, with more volatility than the S&P 500.
Dividend payers display a history of positive cash flows, good capital management, and steady growth, making them solid choices for investors. Here are two dividend stocks you can buy to boost your income from your portfolio today.
Ares Capital Corporation (9.34% yield)
Ares Capital Corporation (ARCC +1.65%) provides financing to middle-market companies that have been neglected by big banks over the past several decades. According to data from PitchBook, banks accounted for 70% of the middle market direct lending market in 1994. Today, they account for just 25% of the market.
Banks have retreated from these lending markets due to tighter lending standards and a shift toward larger deals, leaving middle-market firms behind. This retreat in bank lending has created an opportunity for Ares Capital. The company operates as a business development corporation (BDC) and invests in debt or equity in mid-sized companies that banks overlook.
Ares Capital is also a registered investment corporation (RIC), meaning it must distribute 90% of its income to investors in order to be exempt from federal taxes. As a result, BDCs tend to be excellent stocks for investors looking for a high dividend yield. Over the past 10 years, Ares Capital Corporation has had an average dividend yield of 9.35%.
NASDAQ: ARCC
Key Data Points
Investing in middle-market companies isn't without risk. BDCs tend to use leverage to help boost their payouts. While this leverage can help juice returns, it could also exacerbate losses during an economic downturn. Here's some good news for investors: Ares Capital's debt-to-equity ratio of 0.95 is below the BDC average of 1.06, showing its more conservative use of leverage.
Ares Capital also invests heavily in first-lien or second-lien loans, meaning it would be one of the first creditors paid off in the event of a liquidation. The company also spreads its investments across industries, including software (22.6% of its investment portfolio), healthcare (12.5%), financial services (11.4%), and commercial and professional services (10.2%).
Ares Capital has delivered excellent returns since going public two decades ago, navigating challenging markets during the 2008 Great Recession and the 2020 pandemic-induced recession. It's a stellar income stock to add today.
Hercules Capital (9.89% yield)
Hercules Capital (HTGC +2.05%) is also a BDC, but with a twist. The company focuses on investing in fast-growing start-ups across the technology, life sciences, and renewable energy industries.
Most of the company's assets are in debt structured with warrants, equity, and options, which allows the company to benefit from the upside of investing in these up-and-coming companies. Over the years, 250 of Hercules' portfolio companies, including Palantir Technologies, ChargePoint, Lyft, and FuelCell Energy, have gone public through initial public offerings (IPOs).
Hercules offers investors a regular quarterly dividend payment of $0.40 per share. But, since the value of its assets can be unpredictable, the company also pays out a supplemental dividend when times are good. Recently, the company paid out $0.08 per share each quarter, giving it a dividend yield of nearly 10%.
NYSE: HTGC
Key Data Points
When it comes to leverage, Hercules Capital is quite conservative, with a debt-to-equity ratio of 0.75. On top of that, 88% of its investments are in first-lien senior secured debt, giving it priority in a potential bankruptcy.
Last year, Silicon Valley Bank (a subsidiary of SVB Financial) failed, leaving a big hole in lending for venture capital and start-ups. When it went under, Hercules Capital stepped up to provide capital for companies that needed to meet financing and other short-term obligations.
Hercules Capital has also navigated multiple recessions since its 2005 debut, and its stellar performance across different economic environments makes it another excellent dividend stock for investors to scoop up today.
