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A booming stock market that continues to reach new heights makes it harder to find high-yield dividend payers. The S&P500 reached a new all-time high on October 18. At recent prices, the average dividend-paying stock in the benchmark index offers an uninspiring dividend yield of 1.3%.
The average dividend payer in the S&P 500 index may be unattractive, but there are undervalued companies with ultra-high dividend yields just waiting for income-seeking investors to snap them up. Ares Capital (NASDAQ: ARCC)And EPR properties (NYSE: EPR) offering yields of over 8% at recent prices.
1. Ares Capital
Ares Capital is the world’s largest publicly traded business development company, or BDC. These specialist financiers are filling the gap left by US banks that have been cutting back on direct lending for decades. They are also popular with income-seeking investors because they can legally avoid income taxes by paying out almost all of their profits to shareholders as dividends.
This BDC’s quarterly dividend payout has not increased in a straight line, but is up 26% over the past decade. At recent prices, it offers an 8.9% yield and confidence that comes with ample diversification.
At the end of June, there were 525 companies in Ares Capital’s portfolio. The company to which it is most exposed is responsible for only 1.8% of the total portfolio. Diversification and an enviable track record earned the BDC an investment-grade credit rating, allowing it to recently sell $850 million of five-year bonds with a low coupon of 5.95%.
The mid-market companies that Ares lends to are willing to borrow at higher rates than you might expect. The average return it received on the debt securities in its portfolio was 12.2% in the second quarter. This is even more encouraging when you consider that half of the assets are senior secured, first lien loans, which are the first to be repaid if a bankruptcy occurs.
Ares Capital has so much room to grow that buying shares now and never letting go seems like the right move. The portfolio has grown to nearly $25 billion, but management estimates current demand for mid-market capital at approximately $5.4 trillion.
2. EPR properties
EPR Properties is a real estate investment trust (REIT) which offers a large dividend yield of 9.3% at recent prices. The stock has been under pressure as the recent recovery appears to be losing steam.
This REIT specializes in homes that bring people together in large groups. The share price was under pressure as underperforming theaters accounted for 37% of the total portfolio at the end of June. Investors considering EPR Properties will be happy to know that the theater segment accounted for just 0.3% of total capital expenditures in the first six months of 2024.
Increasingly popular dining and gaming facilities such as Top Golf form a large and growing part of EPR’s portfolio. While total revenue has fallen slightly, a portfolio that is further skewed towards non-theatre tenants is driving an increase in profits.
EPR Properties abruptly stopped paying dividends in the spring of 2020, while the COVID-19 pandemic prevented us from gathering in large groups. In July 2021, it resumed its monthly dividend program at a reduced level.
Since payments restarted in 2021, EPR Properties has increased its dividend by 14% and is positioned to increase this much further. Funds from operations (FFO) is a proxy for income used to evaluate REITs such as EPR properties. This year, management expects adjusted FFO to come in between $4.76 and $4.96 per share, which is more than enough to support and increase a payout currently set at $3.42 per share annually .
The pandemic has taught investors that no one should put too many eggs in EPR’s basket, but EPR’s ability to survive the worst of challenges suggests that EPR can survive all kinds of unforeseen problems. Adding a few beaten-down stocks to a diverse portfolio could be a great way to pump up your long-term passive income stream.
Should You Invest $1,000 in Ares Capital Now?
Consider the following before purchasing shares in Ares Capital:
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Cory Renauer has positions in Ares Capital. The Motley Fool recommends EPR Properties. The Motley Fool has one disclosure policy.
2 Ultra-High Yield Dividend Stocks You Can Buy Now for a Lifetime of Passive Income was originally published by The Motley Fool