I don't rely on dividend income yet. But I'd like to be in a solid position to do so when I'm ready to retire.
The good news is that plenty of great alternatives pay juicy dividends. Here are three ultra-high-yield dividend stocks I'm buying for decades of passive income.
1. Ares Capital
Few stocks offer a dividend as spectacular as Ares Capital(NASDAQ: ARCC). As a business development company (BDC), Ares must return at least 90% of its income to shareholders in the form of dividends for its profits to be exempt from taxes. The company has a lot of income to return with its dividend yield topping 9.2%.
I'm confident Ares Capital will be able to continue delivering solid passive income for a long time to come. For one thing, management doesn't want to end the streak of 15 years of steady to growing dividends. More importantly, Ares should be able to continue generating strong free cash flow.
The company's scale and reputation help. Ares Capital has topped institutional private debt fundraising over the last five years. It has also ranked No. 1 in Private Debt Investor's annual survey every year since 2019. Meanwhile, the market for direct lending is growing.
I like Ares Capital's track record of beating the market too. The stock's cumulative total return since the BDC began trading publicly in October 2004 is more than 65% higher than the cumulative total return of the S&P 500.
2. Enbridge
Unlike Ares Capital, Enbridge(NYSE: ENB) isn't required to pay dividends with its profits. But it does anyway. The midstream energy leader offers a dividend yield of nearly 7.4%.
If there's one thing I like more about Enbridge than its ultra-high dividend yield, though, it's the company's history of dividend hikes. Enbridge has increased its dividend for 29 consecutive years. Impressive.
The company appears to be in good shape to keep those dividends flowing and growing. Enbridge's distributable cash flow payout range is between 60% and 70%. That cash flow is highly reliable with 98% of it generated from cost-of-service or contracted assets.
Enbridge has several growth drivers, including multiple pipeline expansions and built-in revenue escalators. Fortunately, with such a lofty dividend yield the stock doesn't have to appreciate very much for Enbridge to deliver attractive total returns.
3. Verizon Communications
Verizon Communications(NYSE: VZ) is undoubtedly the most well-known of these three companies. The telecommunications giant remains a favorite for many income investors with its dividend yield over 6.6%.
No U.S. telecom company matches Verizon's dividend track record. Verizon has increased its dividend for 17 consecutive years. CEO Hans Vestberg emphasized in the company's Q2 earnings call that "the dividend is very important." He fully intends for Verizon to manage its payout ratio to be able to continue growing its dividend.
The most important metric I watch with Verizon is free cash flow (FCF). Verizon generated $8.5 billion of FCF in the first half of 2024, up from $8 billion in the same period of 2023. The company should be able to keep increasing FCF.
I don't expect jaw-dropping growth from Verizon. Modest growth combined with its dividend should be enough to provide total returns to my liking.
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Keith Speights has positions in Ares Capital, Enbridge, and Verizon Communications. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
