Many dividend stocks offer a pedestrian yield today. Due to a surging stock market and a deemphasis on paying dividends over the years, the S&P 500's yield is currently near its all-time low at around 1.1%.
However, many stocks offer even higher yields. Here are three under-the-radar dividend stocks with monster yields of up to 10.7%.
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Ares Capital
Ares Capital (ARCC 1.14%) currently has a 9.5% dividend yield. The business development company (BDC) operates as a registered investment company. As a result, it must pay out at least 90% of its taxable income as dividends. While many BDCs have struggled to maintain their dividend payments over the years due to changes in interest rates and other factors, Ares Capital has delivered 16 years of stable-to-increasing dividends.
The BDC focuses on providing capital to middle-market companies ($100 million to $1 billion in annual revenue). It makes direct loans and equity investments, which generate interest and dividend income to support its dividend payments.
NASDAQ: ARCC
Key Data Points
The specialty finance company has an exceptional investment track record. Its annualized net realized loss rate is around 0%, better than its peer group (-1.1%) and the banking sector (-0.6%). Areas has a well-diversified portfolio (587 portfolio companies) composed primarily of senior secured loans. It also has an excellent financial profile, enabling it to grow its portfolio of income-generating investments. That should support continued dividend stability and growth.
Starwood Property Trust
Starwood Property Trust (STWD 0.22%) leads this group with a 10.7% dividend yield. The real estate investment trust (REIT) has a similar dividend payout requirement to a BDC, at 90% of its taxable income. While many other REITs have struggled to maintain their dividends (especially mortgage REITs like Starwood), it has never cut its dividend since its 2009 IPO. It has maintained its current payment rate for over a decade.
NYSE: STWD
Key Data Points
Increasing diversification has been one of the keys to Starwood's success. The REIT started by investing in commercial mortgages. It has since expanded into investing directly in high-quality real estate assets and residential and infrastructure lending. This diversification has helped reduce risk while providing it with new growth engines.
Starwood recently expanded into net lease real estate through its $2.2 billion acquisition of Fundamental Income Properties. The deal added a portfolio of 467 properties, secured by long-term net leases (17-year weighted-average lease term) with 2.2% annual rent escalations. This expandable platform will provide Starwood with a stable, growing source of rental income to support its dividend.
Western Midstream Partners
Western Midstream Partners (WES +0.09%) has a 9% distribution yield. Western Midstream is a master limited partnership (MLP). These pass-through entities send their investors a Schedule K-1 Federal tax form. While the MLP reset its distribution level in 2020 due to the pandemic's impact on its earnings, it has since more than rebuilt its payout. Its current distribution rate is well above its pre-pandemic level.
NYSE: WES
Key Data Points
The MLP owns a portfolio of energy midstream assets, the bulk of which generate stable cash flow backed by long-term contracts or government-regulated rate structures. It uses that cash flow to pay distributions, invest in growth capital projects, and make acquisitions.
Western Midstream aims to increase its high-yielding payout at a low-to-mid single-digit annual rate over the long term. It recently closed its $2 billion acquisition of Aris Water Solutions and is building the Pathfinder Pipeline and North Loving II gas processing plant. These growth investments should support continued distribution increases.
Monster income stocks
Ares Capital, Starwood Property, and Western Midstream Partners currently offer investors monster yields. All three companies are in solid positions to at least maintain their big-time payouts going forward. That makes them intriguing stocks to consider buying for passive income.
