Secure a Reliable $500 in Dividends by 2025 through Investing $5,040 in These Three Exceptionally High-Yield Shares.
Over the past couple of years, U.S. equity investors have seen substantial gains. From the end of 2022 up until December 27, the renowned S&P 500 index skyrocketed a whopping 55.5%.
Though stock returns have been impressive, new investors aiming for passive income discovered the downside of this growth - declining dividend yields. With the average stock within the index offering a meager 1.3% yield at recent prices, it's hard to find appealing options.
However, some business development companies (BDCs) have managed to catch the attention of income-focused investors, despite the unappealing yields of many S&P 500 stocks. Shares of firms like Ares Capital (-0.16%), PennantPark Floating Rate Capital (0.69%), and Hercules Capital (-0.03%) offer an appealing average yield of 9.9% at current prices. This means an initial investment of approximately $5,040 divided among them would secure a yearly dividend income of $500.
1. Ares Capital
As the largest BDC with publicly traded shares, Ares Capital has seen its payout gradually increase by 20% over the past five years. With an 8.7% yield, it offers the peace of mind that comes from its dependable record.
The company's investment committee, which manages its underwriting, has issued loans totaling $156 billion over the last 20 years. Boasting an average of over 30 years of experience among its members, it's evident in their financial statements.
At the end of September, Ares Capital maintained a loan portfolio worth $25.9 billion. Out of its 535 portfolio companies, only a small fraction are struggling to meet their loan payments. Loans on nonaccrual status amounted to just 1.3% of the total portfolio at cost.
Most of Ares Capital's portfolio, around 69%, consists of floating-rate loans. Due to increased interest rates in 2022, this led to some unpaid loans, but even during this period, loans on nonaccrual status peaked at 1.7% of the portfolio at cost, in the first quarter of 2024.
With the Federal Reserve lowering its target rate by a full percentage point, Ares Capital's portfolio could experience further stability.
PennantPark Floating Rate Capital
PennantPark Floating Rate Capital is another reliable BDC that's worth considering for passive income enthusiasts. Offering a large 11.3% yield at current prices, and convenient monthly dividends, it's an excellent addition to any dividend portfolio.
Since the company's inception, it has successfully maintained or raised its dividend payout every year without failing, even during unfavorable interest rate environments.
PennantPark is specialized in providing financing for smaller middle-market businesses, generating annual earnings between $10 million and $50 million before interest, taxes, depreciation, and amortization.
At the end of September, PennantPark's portfolio was smaller compared to Ares Capital's, but its selective underwriting team demonstrated expertise in choosing creditworthy borrowers. Only two borrowers representing 0.4% of the portfolio at cost were on nonaccrual status at the end of the same period.
Hercules Capital
With an tempting 9.7% yield at current prices, Hercules Capital is another BDC worthy of attention.
Unlike PennantPark and Ares, Hercules Capital takes an unusual approach by investing in small businesses focusing on innovation in technology and life science. Its $3.6 billion portfolio includes numerous small equity and warrant investments in various cutting-edge companies.
By the end of September, Hercules owned equity positions in 76 companies and warrant positions in 98. Although many of these investments may fail, the successful ones can far outweigh the losses. For example, the BDC's equity stake in 23andMe has not yielded positive results, but its investment in Palantir has already grown over tenfold.
As a BDC, Hercules is required to distribute at least 90% of its earnings to shareholders as dividends. However, given the unpredictable nature of its equity and warrant portfolio, Hercules distributes a steady quarterly dividend, with a supplementary dividend that varies to account for these uncertainties.
Hercules Capital's dividend might seem volatile on a chart, but in reality, its quarterly payout has remained consistent, growing from $0.20 to $0.40 per share since 2010. Investors could see dividend increases, substantial supplementary dividends, or a combination of both in 2025.
During the first nine months of 2024, Hercules' total investment income grew by 10% year over year. Moreover, Hercules expanded its debt portfolio by about 12% during this period. This rapidly expanding portfolio could lead to increased earnings and, in turn, higher dividends passing through to its shareholders. Adding Hercules Capital stocks to a diversified portfolio appears as an excellent strategy to boost your passive income stream.
- Investing in BDCs like Ares Capital can provide a higher dividend yield than many S&P 500 stocks, as demonstrated by Ares Capital's 8.7% yield, which has increased by 20% over the past five years.
- For those seeking passive income, PennantPark Floating Rate Capital is another BDC to consider, with a substantial 11.3% yield and a track record of maintaining or raising its dividend payout annually.
