The major market indexes have risen sharply this year, but not all major stocks have participated in the rally. Right now, there are a handful of defeated dividend payers offering ultra-high dividend yields.
A high dividend yield is usually a good sign that a company is in trouble and can’t increase its payout much further. These three stocks stand out because they offer huge returns upfront, and there’s a good chance they can further increase their payouts in the coming years.
Read on to find out why adding these stocks to your portfolio this June could result in huge amounts of passive income by the time you’re ready to retire.
1. AT&T
AT&T (NYSE:T) divested the last unpredictable media assets in 2023 and reduced the dividend payout accordingly. However, the stock has fallen so far that it still offers a dividend yield of 6.4% at recent prices.
Now that it is purely a telecommunications company, the cash flows can be relatively predictable. As one of only three 5G wireless network providers in America, income-seeking investors can reasonably expect these cash flows to rise steadily in the coming years.
AT&T lost fixed broadband customers to cable and fixed wireless solutions Verizon And T-Mobile. Late last year, the company finally launched a fixed wireless broadband service for people away from fiber optic cables.
In response to a successful fiber optic service and a new fixed wireless service, management expects total broadband revenues to increase by more than 7% this year.
2. Ares capital
With a portfolio worth approximately $23 billion, Ares Capital (NASDAQ: ARCC) is the largest publicly traded business development company (BDC). These specialized entities are essentially lenders to mid-market companies, which are generally too small to attract the attention of major U.S. banks.
At recent prices, Ares Capital offers a dividend yield of 9%, and this figure could rise. Many mid-sized companies are short of capital and willing to pay high interest rates for secured loans.
In the first quarter, Ares received an average return of 12.4% on the debt-related securities in its portfolio. Prudent investors will be happy to know that 59% of assets are made up of first- and second-lien senior secured loans, which are first in line to be repaid if a borrower declares bankruptcy.
Inflation and higher interest rates make it extra difficult for Ares Capital’s borrowers to repay their debts. Fortunately, this BDC’s underwriting team is adept at selecting borrowers with strong cash flows. Non-accrual loans fell year over year to $397 million, just 1.7% of the total portfolio at cost.
3. Hercules Capital
Hercules capital (NYSE:HTGC) is another BDC, but its operation is very different from Ares Capital. Hercules provides massive amounts of loans in the range of $25 million to $100 million to early-stage companies with disruptive technology.
Many of Hercules Capital’s investments will not pay off, but those that do can more than offset the losses. For example, in the first quarter, four of the portfolio companies signed merger and acquisition agreements. Also in the first quarter, two portfolio companies filed applications that could lead to initial public offerings (IPOs).
Currently, Hercules Capital shares pay $0.40 per quarter as a regular dividend, which the company has steadily increased since 2010. It also gives shareholders an additional benefit that can change from year to year. The current additional quarterly dividend is $0.08 per share. If the price remains stable, investors who buy the shares at recent prices will receive a return of 9.9%.
Hercules Capital’s total dividend may not rise in a straight line, but in five years, long-term investors will likely receive a return well above 9.9% of their original investment. Assets under management grew 14.7% year-on-year, while the BDC deployed record levels of capital in the first quarter.
Should You Invest $1,000 in AT&T Now?
Consider the following before buying stock in AT&T:
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Cory Renauer has positions in Ares Capital. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
3 High-Yield Dividend Stocks to Buy in June and Hold for 10 Years or More Originally published by The Motley Fool
