A buoyant stock market that keeps reaching new heights is making it tougher to find high-yield dividend payers. The S&P 500 reached a new all-time high on Oct 18. At recent prices, the average dividend-paying stock in the benchmark index offers an uninspiring 1.3% dividend yield.
The average dividend payer in the S&P 500 index might be unappealing, but there are underappreciated businesses with ultra high dividend yields waiting for income-seeking investors to scoop them up. Ares Capital (ARCC), and EPR Properties (EPR) offer yields above 8% at recent prices.
1. Ares Capital
Ares Capital is the world’s largest publicly traded business development company, or BDC. These specialty financiers fill the gap left by U.S. banks that have been dialing back their direct lending operations for decades. They are also popular with income-seeking investors because they can legally avoid paying income taxes by distributing nearly all their profits to shareholders as dividends.
At the end of June, there were 525 companies in Ares Capital’s portfolio. The company it’s most exposed to is responsible for just 1.8% of the total portfolio. Diversification and an enviable track record earned the BDC an investment-grade credit rating that recently allowed it to sell $850 million worth of five-year notes with a low 5.95% coupon.
The midsize businesses Ares lends to are willing to borrow at higher rates than you might expect. The average yield it received from the debt securities in its portfolio was 12.2% in the second quarter. This is even more encouraging when you consider half of its assets are first-lien senior secured loans, which are first to be repaid if there’s a bankruptcy.
Ares Capital has so much room to grow that buying shares now and never letting go looks like the right move. Its portfolio has swelled to nearly $25 billion but management estimates the current demand for mid-market capital at about $5.4 trillion.
2. EPR Properties
EPR Properties is a real estate investment trust (REIT) that offers a big 9.3% dividend yield at recent prices. The stock has been under pressure because it looks like its recent recovery is losing steam.
Increasingly popular eat-and-play facilities like Top Golf make up a large and growing share of EPR’s portfolio. While total revenue has declined slightly, a portfolio leaning further toward non-theater tenants is pushing up profits.
Since restarting payments in 2021, EPR Properties has raised its dividend by 14% and it’s in a position to raise it a lot further. Funds from operations (FFO) is a proxy for earnings used to evaluate REITs like EPR properties. This year, management expects adjusted FFO to land in a range between $4.76 and $4.96 per share, which is more than enough to support and raise a payout currently set at an annualized $3.42 per share.
The pandemic taught investors that nobody should put too many eggs in EPR’s basket, but its ability to survive the worst of the challenge suggests it can survive all kinds of unforeseen issues. Adding some beaten-down shares to a diverse portfolio now could be a great way to pump up your passive income stream over the long run.
— Cory Renauer
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Source: The Motley Fool