Portfolio growth can come from many different sources. While areas including artificial intelligence (AI) or genomics are hot at the moment, one area of investing that rarely goes out of style is dividend investing.
Dividends can provide a lucrative source of passive income. And thanks to the power of compounding, reinvesting dividends and holding on to your winners for the long run can especially help investors build generational wealth.
Let's explore 10 stocks that have ultra-high dividend yields, and assess why each is worth a close look in 2024.
1. Hercules Capital: 10.6% dividend yield
Hercules Capital(NYSE: HTGC) is a business development company (BDC) that specializes in providing capital to venture-backed start-ups. Hercules is different from a typical bank as it tends to offer more flexible financing options. So while Hercules may be assuming more risk than a bank would typically underwrite, the company attaches high coupon rates onto its term loans and also usually negotiates for warrants as part of the deal structure. This provides Hercules with an extra sweetener should one of its portfolio companies liquidate in an initial public offering (IPO) or acquisition.
Since Hercules is a BDC, it's required to pay out 90% of its taxable income to shareholders each year in the form of a dividend. While this inherently makes Hercules appealing for dividend investors, the company's operational performance has proven strong. As such, shareholders have cheered the stock for quite some time. Over the last 10 years, Hercules stock has a total return of 230%.
Given its successful long-term performance, coupled with a juicy dividend yield of 10.6%, passive income investors may want to scoop up shares in Hercules stock.
Image source: Getty Images.
2. Ares Capital: 9.5% dividend yield
Another BDC on my list is Ares Capital(NASDAQ: ARCC). What makes Ares a bit different than Hercules is that the company tends to focus on lower middle-market businesses across a wider array of industries. Given its size, Ares also has more financial flexibility than a typical BDC. The company specializes in more complex transactions such as leveraged buyouts, for example.
One thing that makes Ares especially unique is its position as a Warren Buffett holding. While Buffett is mostly known for his Berkshire Hathaway portfolio, the Oracle of Omaha actually has another investment vehicle. New England Asset Management (NEAM) is a subsidiary of Berkshire, and one of its positions is none other than Ares.
The chart below tracks the total return of Ares stock versus a number of leading S&P 500-themed exchange-traded funds (ETFs). Given its outperformance compared to the SPDR S&P 500 ETF Trust, Invesco S&P 500 Equal Weight ETF, and Vanguard S&P 500 ETF, investors could follow Buffett's lead and enjoy market-beating returns in this little-known BDC.
ARCC Total Return Level data by YCharts
3. Horizon Technology: 11.1% dividend yield
Horizon Technology(NASDAQ: HRZN) is one of Hercules's biggest rivals. The company also specializes in venture debt for start-ups in the technology, life sciences, and sustainable energy industries.
With dividends reinvested, Horizon stock has returned 131% during the past decade. While that lags Hercules' performance, investors shouldn't look down on Horizon.
Since its price-to-book (P/B) ratio of 1.2 is modestly lower than Hercules's 1.6, I see Horizon as a nice hedge position to that of other BDCs. Now could be a good opportunity to scoop up shares at an 11% yield and a nice discount to its top rival.
4. Energy Transfer: 8.4% dividend yield
Energy Transfer(NYSE: ET) specializes in natural gas transportation and storage. As a master limited partnership (MLP), Energy Transfer acts as a pass-through entity -- meaning that both profits and losses are passed through limited partners (like investors).
Energy Transfer currently trades at a price-to-earnings (P/E) ratio of 13.9 -- about half of its long-term average. Given its recent acquisition of Crestwood Energy Partners, I think investors may be discounting the effect on Energy Transfer's future growth.
With shares trading at such a steep discount to historical valuation levels, now could be a good time to start a position at an 8% yield.
5. Enterprise Products Partners: 7.2% dividend yield
The chart below shows that, even with inconsistent free cash flow, midstream energy company Enterprise Products Partners(NYSE: EPD) has managed to raise its dividend, which yields about 7.2%. I see this as a clear sign of premium shareholder value.
EPD Free Cash Flow (Quarterly) data by YCharts
Right now, Enterprise Products Partners trades at a forward P/E of just 10.3. Since the S&P 500 is trading at a forward P/E of 23.4, Enterprise Products Partners looks incredibly undervalued compared to the broader market.
Given the company's recent acquisitions, I think investors could be discounting the long-run potential of Enterprise Products Partners.
6. Enbridge: 7.8% dividend yield
Enbridge(NYSE: ENB) is a natural gas storage and pipeline management operation. During the past year, the shares fell 10% -- vastly underperforming the broader market.
The energy sector has faced its share of headwinds during the past year due to a combination of lingering inflation and geopolitical tensions. Nevertheless, Enbridge has remained focused, and like its energy peers above, it's resorting to acquisitions to jump-start new growth.
In September 2023, the company acquired three gas utilities from Dominion Energy. Enbridge's chief executive officer called the deal a "once-in-a-generation opportunity" as the company builds North America's largest gas utility.
At a P/E of just 16.5, Enbridge is trading well below its five-year average of 26.4. While the jury is still out regarding the long-term effects of the Dominion deal, it's hard to pass up shares at such a steep discount and a nearly 8% yield.
7. Kinder Morgan: 6.5% dividend yield
Last year was challenging for Kinder Morgan(NYSE: KMI). Revenue, EBITDA (earnings before interest, taxes, depreciation and amortization), and free cash flow saw some dips that resulted in a modest sell-off of the stock.
But like its energy peers above, Kinder Morgan looks well positioned to return to growth after its acquisition of STX Midstream. I'm optimistic that 2024 will be a rebound year for the company, which could result in further distribution increases for shareholders.
At a 6.5% yield, now could be an interesting time to buy shares as Kinder Morgan looks to right the ship and return to growth.
8. Rithm Capital: 9.1% dividend yield
Rithm Capital(NYSE: RITM) is a real estate investment trust (REIT). Like BDCs, REITs are required to pay out 90% of their taxable income to shareholders in the form of a dividend.
Currently, shares of Rithm are trading over 40% below decade highs. My suspicion is that sentiment surrounding the real estate industry has soured during the past few years, given mixed outlooks on the macroeconomy.
The thing to keep in mind is that REITs come in many different forms. Rithm is a mortgage REIT, competing with companies like Arbor Realty Trust, Annaly Capital Management, and AGNC Investment Corp. At a P/B of just 0.92, Rithm is trading at the lowest multiple among this peer set.
Now could be a unique opportunity to buy shares in Rithm as it trades at a discount to its peers and offers investors a sizzling 9.1% yield.
9. Altria: 9.6% dividend yield
Altria(NYSE: MO) is home to some of the world's most recognized tobacco brands. The company sells cigarettes under the Marlboro and Black & Mild monikers, as well as smokeless tobacco products on! and NJOY.
The past few years have been tough for the tobacco market. Lingering inflation and high borrowing costs have put a strain on consumer purchases. Wellness is generally on the rise as well -- making it more challenging for Altria to market its products to health-conscious consumers.
While growth is a concern for Altria at the moment, there is one big reason to own this stock.
MO Dividend data by YCharts
Altria has earned a position on the exclusive list of Dividend Kings -- companies that have raised their dividends for at least 50 consecutive years. No matter what challenges the company has faced, the company always finds a way to put shareholders first and not only continue paying a dividend, but increasing it.
10. Verizon Communications: 6.6% dividend yield
To be blunt, telecommunications provider Verizon(NYSE: VZ) isn't exactly synonymous with monster growth. The telecom industry is becoming increasingly commoditized, with major players like AT&T, T-Mobile, and Comcast generally offering the same products and competing on price.
But like Altria, one thing that makes Verizon more compelling than its peers is its historically rising dividend.
VZ Dividend Yield data by YCharts
In September 2023, Verizon raised its dividend for the 17th consecutive year. In contrast, AT&T slashed its dividend a couple of years ago, and has not raised it since. Meanwhile, the dividend yields of T-Mobile and Comcast both pale in comparison to that of Verizon.
While Verizon may not offer the tempting growth prospects of hot tech stocks, the company is best-in-breed when it comes to telecom providers. I see its dividend as safe, given the company's commitment to raising it every year for almost two decades.
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Enbridge, Kinder Morgan, and Vanguard S&P 500 ETF. The Motley Fool recommends Comcast, Dominion Energy, Enterprise Products Partners, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.
