The major market indexes are way up this year, but not every great stock has participated in the rally. At the moment, there are a handful of beaten-down dividend payers offering ultra-high dividend yields.
A high dividend yield is usually a good sign that a business is in trouble and won't be able to raise its payout much further. These three stocks stand out because they offer huge yields up front, plus there's a good chance that they could raise their payouts further in the years ahead.
Read on to see why adding these stocks to your portfolio in June could result in heaps of passive income by the time you're ready to retire.
1. AT&T
AT&T (T +3.69%) spun off the last of its unpredictable media assets in 2023 and lowered its dividend payout accordingly. The stock has fallen far enough, though, that it still offers a 6.4% dividend yield at recent prices.
NYSE: T
Key Data Points
Now that it's purely a telecommunications business, cash flows could be relatively predictable. As one of just three 5G wireless network providers in America, income-seeking investors can reasonably expect those cash flows to rise steadily in the years ahead.
AT&T had been losing wireline broadband customers to cable and fixed wireless solutions from Verizon and T-Mobile. Late last year, the company finally launched a fixed wireless broadband service for folks who aren't near its fiber-optic cables.
In response to a successful fiber-optic service and a new fixed wireless service, management expects total broadband revenue to rise more than 7% this year.
2. Ares Capital
With a portfolio valued at about $23 billion, Ares Capital (ARCC 1.00%) is the largest publicly traded business development company (BDC). These specialized entities are, essentially, lenders to mid-sized businesses, which are generally too small to get attention from large American banks.
NASDAQ: ARCC
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At recent prices, Ares Capital offers a 9% dividend yield, and this figure could rise. Plenty of middle-market companies are starved for capital and willing to pay high interest rates for secured loans.
In the first quarter, Ares received an average yield of 12.4% on the debt-related securities in its portfolio. Cautious investors will be glad to learn that 59% of its assets are first- and second-lien senior secured loans, which are first in line to be repaid if a borrower declares bankruptcy.
Inflation and higher interest rates are making it extra difficult for Ares Capital's borrowers to repay their debts. Luckily, this BDC's underwriting team is skilled at selecting borrowers with strong cash flows. Loans on non-accrual status fell year over year to $397 million, just 1.7% of the total portfolio at cost.
3. Hercules Capital
Hercules Capital (HTGC 0.26%) is another BDC, but its operation is very different from Ares Capital. Hercules makes heaps of loans in the $25 million to $100 million range to early-stage businesses with disruptive technology.
NYSE: HTGC
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Many of Hercules Capital's investments will not pay off, but the ones that do can more than offset the losses. For example, in the first quarter, four of its portfolio companies signed merger and acquisition agreements. Also in the first quarter, two portfolio companies submitted applications that could lead to initial public offerings (IPOs).
At the moment, Hercules Capital shares pay $0.40 per quarter as a regular dividend that the company has steadily increased since 2010. It also gives shareholders a supplemental distribution that can change from year to year. The current supplemental quarterly dividend is $0.08 per share. If it holds steady, investors who buy the stock at recent prices will receive a 9.9% yield.
Hercules Capital's overall dividend might not rise in a straight line, but five years from now, its long-term investors will likely receive a yield far above 9.9% of their original investment. Assets under management grew 14.7% year over year as the BDC deployed record levels of capital in the first quarter.
