Investors looking for a quick and easy way to pump up their passive income stream have some interesting options right now. A mortgage-focused real estate investment trust and a business development company are offering double-digit dividend yield percentages at recent prices.
If you've been dividend investing for more than a few years, you may have already learned the hard way that yields above 10% aren't very dependable. For folks who prefer lower exposure to risk, there's a life-science-focused real estate investment trust (REIT) offering a yield above 7% at recent prices.
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With an average yield of 11.2% at recent prices, an investment of $8,910 spread evenly among Annaly Capital Management (NLY 0.04%), PennantPark Floating Rate Capital (PFLT +0.96%), and Alexandria Real Estate Equities (ARE 1.02%) is enough to generate $1,000 in dividend income over the next 12 months. Before risking any of your hard-earned money, though, there are a few things you want to know about these businesses.
1. Annaly Capital Management
Annaly Capital Management is one of the largest mortgage REITs, or mREITs, that you can invest in. Its main source of income is mortgage-backed securities (MBSes), most of which consist of loans backed up by a government agency in the event of a default.
At recent prices, Annaly Capital Management stock offers an eye-popping 14.6% yield. The yield is super high because the Federal Reserve hasn't been buying new bonds when the old ones mature. The lack of demand is reducing MBS values, which wouldn't be a problem if Annaly weren't so heavily levered. At the end of March, Annaly's $75 billion MBS portfolio was anchored to just $8 billion in committed capital.
NYSE: NLY
Key Data Points
If MBS values drop further, Annaly's creditors could force the mREIT to sell off portions of its portfolio at fire sale prices. A smaller portfolio means less income to pay dividends. This vicious cycle is a big reason long-term Annaly shareholders currently receive dividend payments that are 42% lower than the payments they were receiving a decade ago.
The mREIT has diversified its operations with mortgage servicing and residential credit businesses. With a majority of its income stream still tied up in its MBS portfolio, though, consistent dividend payments from this stock are a long way from guaranteed.
2. PennantPark Floating Rate Capital
PennantPark Floating Rate Capital is a business development company (BDC). Like REITs, these specialized entities can avoid paying income taxes by distributing nearly all their profits to investors as dividend payments. This BDC offers monthly payments and a huge 11.8% dividend yield at recent prices.
NYSE: PFLT
Key Data Points
Since its stock market debut in 2011, PennantPark Floating Rate Capital's dividend payout has only ever moved in the right direction for investors. Despite an outstanding track record, the stock has been under pressure from President Trump's tariff proposals.
As its name implies, this BDC's borrowers agree to pay interest rates that can change. Those rates have risen significantly over the past several years. In addition to higher debt servicing expenses, an intensifying trade war could make meeting commitments extra difficult in the quarters ahead.
Unlike most BDCs, this one focuses on midsize businesses that earn between $10 million and $50 million annually before deducting interest, taxes, depreciation, and amortization (EBITDA). Businesses of this size could be more susceptible to new tariffs than their larger peers, but this company's track record to date suggests its portfolio can weather the storm. At the end of March, just four portfolio companies representing just 1.2% of the portfolio's value were on nonaccrual status.
3. Alexandria Real Estate Equities
Economic output from America's biopharmaceutical industry works out to around $1.65 trillion annually. Alexandria Real Estate Equities is a net lease REIT focused on the biopharmaceutical industry and life science-related business. At recent prices, it offers a 7.3% yield and an encouraging annual payout-raising track record.
NYSE: ARE
Key Data Points
This REIT lowered its payout in 2009, but has raised it every year since then. Over the past decade, shareholders have seen their quarterly payments grow by 71.4%.
Investments in biopharmaceutical startups that soared during the COVID-19 pandemic have collapsed. Alexandria Real Estate stock has been under pressure because precommercial-stage biotechnology businesses are responsible for more than 10% of annual rental revenue.
Management added fuel to smoldering concerns regarding a lack of investment for new drugmakers by lowering its profit forecast when it reported first-quarter results this April. Before running for the hills, investors should know that it was a very small reduction. At the midpoint of management's new guided range, adjusted funds from operations (FFO), a proxy for earnings used to evaluate REITs, are expected to reach $9.26 per share this year instead of the $9.33 per share midpoint shared in January.
If Alexandria Real Estate were stretched thin, the relative lack of new life science investment would be troubling. With a dividend payout currently set at an annualized $5.28 per share, though, this REIT can weather a fiercer storm than we've already seen and still keep up its dividend-raising streak. Adding some shares to a diversified portfolio looks like a great way for most investors to grow their passive income stream.
