Investors looking for a way to pump up their passive income stream with dividend-paying stocks are having a tough time lately. The benchmark S&P 500 index has risen a stunning 43% since the end of 2022. The gains have been terrific for the stocks already in our portfolios, but finding reliable dividend payers that still offer high yields is a lot harder than it used to be.
However, it isn't impossible. Bristol Myers Squibb(NYSE: BMY), PennantPark Floating Rate Capital(NYSE: PFLT), and Ares Capital(NASDAQ: ARCC) offer an average yield of 8.5% at recent prices.
Investors who want to secure $1,000 in annual dividend income can do so with about $11,800 invested evenly among these three stocks. Here's why they look like great options for folks who want a big injection of passive income in the near term plus a good chance to see their payouts grow over time.
1. Bristol Myers Squibb
While the rest of the stock market was soaring, shares of Bristol Myers Squibb were falling. The Big Pharma stock is down by about 45% since the end of 2022.
Yet at the same time, the company has raised its dividend payout for 15 consecutive years. At recent prices, it offers a juicy 6% yield.
Bristol Myers Squibb stock is down sharply this year because the company slashed expectations for 2024. In April, management lowered the midpoint of its adjusted earnings outlook by 92% to a range between $0.40 and $0.70 per share.
Bristol Myers Squibb recorded a heavy loss in the first quarter, associated with recent acquisitions of clinical-stage drugmakers. That doesn't mean it will have a hard time meeting its dividend commitment and raising it higher in the years ahead. First-quarter revenue rose 5% year over year, and continued gains seem likely.
In June, the company earned Food and Drug Administration approval for two new cancer therapies. With new treatments to offset losses from old ones that will lose patent-protected exclusivity, many more years of gains seem likely.
2. PennantPark Floating Rate Capital
If the pharmaceutical industry's ups and downs make you nervous, consider PennantPark Floating Rate Capital. This is a business development company (BDC), which essentially means it makes relatively high-interest loans to businesses that are large, but not large enough to get loans from traditional banks.
As its name implies, nearly all the loans this BDC originates collect interest at floating rates. At the end of March, 87% of its loan portfolio was first-lien senior secured debt. That means PennantPark is first in line to be repaid in the unlikely event of bankruptcy.
PennantPark's experienced underwriting team will help long-term investors rest easily. Among 146 companies in its portfolio, just one is on nonaccrual status at the moment.
Investors will be glad to know PennantPark Floating Rate Capital's payout has risen by 13.9% over the past 10 years. The BDC doesn't increase its dividend payout rapidly, but it offers such a high yield that it can still produce market-beating gains for patient investors.
3. Ares Capital
By market capitalization, Ares Capital is the world's largest publicly traded BDC, with an investment portfolio that rose to $23.1 billion in the first quarter. At recent prices, it offers a 9.1% dividend yield.
The mid-market businesses Ares Capital lends to generate enough cash to repay their loans, but they're so starved for capital that they agree to eye-popping interest rates. The average yield on the securities in its portfolio was 12.4% in the first quarter.
Ares Capital became the leading BDC by employing a variety of strategies, but its portfolio isn't very risky. In the first quarter, 59% of its assets were first and second-lien secured loans, and 68% of those collect interest at floating rates. In the first quarter, loans on nonaccrual status equaled just 1.7% of the total portfolio at cost.
There are 510 companies in Ares Capital's portfolio at the moment, and heaps of existing relationships make finding new borrowers relatively easy. Since 2004, it's completed transactions with around 450 private equity sponsors.
Ares Capital has been able to raise its dividend by 26% over the past decade. With a diversified strategy that's working well, another decade of dividend payout growth isn't an unreasonable expectation.
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Cory Renauer has positions in Ares Capital. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.
