There are lots of ways to put your money to work on Wall Street, but none are as reliable as investing in dividend-paying stocks. That's because companies rarely commit to distributing a portion of their profits to shareholders unless they're already profitable and likely to stay that way.
Dividend-paying businesses have to be extra careful with their cash flows, which tends to benefit investors. These increased returns that come with regular distributions are measurable and stronger than you might expect.
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During the 50-year period between 1973 and 2023, non-dividend-paying stocks in the S&P 500 index delivered a 4.27% average annual return. Their dividend-paying cousins performed more than twice as well with an average annual return of 9.17% over the same time frame.
At recent prices, Ares Capital(NASDAQ: ARCC), PennantPark Floating Rate Capital(NYSE: PFLT), and Rithm Capital(NYSE: RITM) offer dividend yields of 9.1% and better. Generally, stocks don't offer yields this high unless investors have concerns about their underlying businesses. These three stand out because they are on better financial footing than their ultra-high yields suggest.
1. Ares Capital
Ares Capital is the world's largest publicly traded business development company (BDC). These specialized entities fill the gap left by big banks that no longer lend directly to most businesses. They're also popular among income-seeking investors because they can legally avoid paying income taxes by distributing at least 90% of their earnings as dividend payments.
At recent prices, Ares Capital offers investors a 9.1% yield and confidence that comes with a highly diversified portfolio. At the end of September, it had investments worth $25.9 billion spread out among 535 borrowers. Its single-largest borrower is responsible for just 1.7% of the portfolio.
Ares Capital's dividend hasn't risen in a straight line, but it is up by 26% over the past decade. The odds of a dividend cut in the quarters ahead seem extremely slim. Loans representing just 1.3% of total investments at cost were on non-accrual status at the end of September.
2. PennantPark Floating Rate Capital
PennantPark Floating Rate Capital is another lender for mid-sized companies that can't get banks to return their calls. As its name implies, this BDC isn't very sensitive to interest rate adjustments because the loans it originates collect interest at variable rates.
The average yield on PennantPark's debt investments was a very healthy 12.1% at the end of June. The Federal Reserve started lowering interest rates in September. This will lower the yield the BDC receives, but its cost of capital will likely shrink, too when it reports results from the quarter that ended Sept. 30, 2024, on Nov. 25, 2024.
Shares of PennantPark Floating Rate offer investors a huge 11% dividend yield at recent prices, plus extra convenient monthly payments. With a brief exception in 2018, it has raised or maintained its payout since 2015.
PennantPark doesn't have Ares Capital's size, but its underwriting team is highly capable of finding borrowers that generate enough cash to repay their debts. At the end of June, just three companies representing 1.5% of the total portfolio at cost were on non-accrual status.
3. Rithm Capital
Rithm Capital is a real estate investment trust (REIT) that doesn't mess around with physical properties. Instead, it deals in mortgage origination and servicing, mortgage-backed securities, and single-family rentals.
Maintaining a diverse portfolio of mortgage-related assets has been a winning strategy for Rithm Capital and its long-term shareholders. The company lowered its dividend payout once in early 2020 and has since raised it twice.
At recent prices, Rithm Capital offers a big 9.5% yield that it could raise further. Earnings available for distribution rose to $0.54 per share in the third quarter from $0.47 per share in the second quarter. This is more than enough to meet a dividend commitment currently set at $0.25 per share.
Rithm estimated its book value at $6.4 billion at the end of September. At recent prices, though, you could buy every outstanding share for just $5.5 billion. That's a bargain most income-seeking investors won't want to pass up.
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Cory Renauer has positions in Ares Capital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
