A good stock market that keeps reaching new highs makes it harder to find high-yielding dividend payers. At 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 may not be exciting, but there are undervalued businesses with high dividend yields waiting for income-seeking investors to snap them up. The capital of Ares (NASDAQ: ARCC)and Properties of EPR (NYSE: EPR) deal above 8% on new prices.
1. The capital of Ares
Ares Capital is the world’s largest publicly traded business development company, or BDC. This specialized financing fills the gap left by US banks that have dialed back their direct lending operations for decades. They are also popular with income-seeking investors because they can legally avoid paying income tax by distributing almost all of their profits to shareholders as dividends.
Subsequent dividend payments on this BDC stock have not risen in a straight line, but have risen by 26% over the past 10 years. At the new prices, it offers 8.9% yield and confidence that comes with a lot of diversification.
At the end of June, there were 525 companies in Ares Capital’s portfolio. The most exposed companies account for only 1.8% of the total portfolio. Diversification and an impressive track record earned BDC an investment credit rating that recently allowed the sale of $850 million of five-year notes with a coupon of 5.95%.
Midsize business Ares lends willing to borrow at a higher rate than expected. The average yield earned on debt securities in the portfolio was 12.2% in the second quarter. This is even more encouraging when you consider half of these assets are senior secured loans, which must be paid off first in the event of bankruptcy.
Ares Capital has a lot of room to grow, so buying the stock now and never letting it go seems like the right move. The portfolio has grown to nearly $25 billion but management estimates middle market capital demand is currently around $5.4 trillion.
2. Properties of EPR
EPR Properties is a real estate investment trust (REIT) that offers a dividend yield of 9.3% at closing price. Stocks are already under pressure as it looks like a recent recovery is missing out.
This REIT specializes in properties that bring people together in large groups. The share price has been under pressure as underperforming theaters made up 37% of the total portfolio at the end of June. Investors considering EPR Properties will be pleased to know that the theater segment is responsible for only 0.3% of total investment spending in the first six months of 2024.
Increasingly popular eat-and-play facilities like Top Golf make up a large and growing part of EPR’s portfolio. While the total revenue has declined slightly, the portfolio leans more towards non-theatre tenants pushing up profits.
EPR Properties suddenly stopped paying dividends in the spring of 2020 when the COVID-19 pandemic prevented us from joining the big group. It restarts its monthly dividend program at a reduced rate in July 2021.
Since starting repayments in 2021, EPR Properties has raised its dividend to 14% and could increase it further. Funds from operations (FFO) is a proxy for earnings used to value 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 the payout currently set at $3.42 per share.
The pandemic has taught investors that no one should put too many eggs in the EPR basket, but its ability to survive these challenges shows that it can survive all kinds of unexpected problems. Adding some beaten-down stocks to a diversified portfolio now can be a great way to maximize your passive income stream over the long term.
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Cory Renauer has a position in Ares Capital. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.
2 Ultra-High-Yield Dividend Stocks to Buy Now for a Lifetime of Passive Income was originally published by The Motley Fool
