Key Points
Investors have numerous options for high-yield dividend stocks.
However, only a few stand out as strong long-term opportunities.
These top high-yield stocks include entities like BDCs, MLPs, and REITs, along with two regular C-corporations.
- 10 stocks we like better than Ares Capital ›
When it comes to investing in high-yield dividend stocks, you want to go beyond just buying the highest-yielding stocks out there and calling it a day. That's because among the many dividend stocks offering above-average yields, many are best described as yield or value traps.
These types of stocks, in the long run, can generate subpar returns, either due to dividend cuts or suspensions or to weak fundamentals that lead to lower share prices. Instead of just buying the highest-yielding stocks, you'll want to consider factors like consistency, growth, and quality.
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Taking such factors into account, one can filter down the long list of dividend stocks with yields of 5% or more, ending up with a short list of high-yield standouts. That's the situation here for the following five dividend stocks: Ares Capital (NASDAQ: ARCC), Brookfield Infrastructure Partners (NYSE: BIP), Enbridge (NYSE: ENB), Altria Group (NYSE: MO), and Realty Income (NYSE: O).
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1. Ares Capital is a high-quality BDC with a high yield to boot
Ares Capital is a business development company (BDC), which are pass-through entities similar to real estate investment trusts (REITs). However, unlike REITs, which invest in real estate, BDCs make equity and debt investments, primarily in privately held small- and medium-sized businesses. Ares Capital has a forward dividend yield of 10.3%.
With this double-digit yield, you might think there's significant uncertainty about Ares's future payouts. However, this BDC has regularly paid out dividends since its inception in 2004. Furthermore, Ares' $29.5 billion portfolio, composed of debt and equity investments in more than 600 companies, consists mainly of high-quality assets, such as secured debt, which is another factor that makes it one of the stronger BDC stocks out there.
2. Brookfield Infrastructure Partners has a strong distribution growth track record
Managed by Canadian asset manager Brookfield, this master limited partnership invests in infrastructure assets such as energy pipelines and toll roads. Brookfield Infrastructure Partners' high level of geographic and asset diversity is key to its success, providing its investors with steady distributions that have increased over time.
Currently, Brookfield Infrastructure Partners has a forward yield of just over 5%. This may put it on the cusp of high-yield dividend stocks, but what Brookfield may lack in yield is more than made up for by dividend growth. This MLP has increased its payouts nearly 20 years in a row. Over the past decade, dividend growth has averaged 6.2%, with Brookfield Infrastructure Partners prioritizing targeted annual distribution growth of 5% to 9%.
3. Enbridge has decades of dividend performance
Canada-based Enbridge is one of the world's leading midstream energy companies. It owns and operates a large portfolio of crude oil and natural gas pipelines. Thanks to the steady, toll-road-like revenue generated from these assets, the company has provided investors with steady dividend growth. Currently, the stock has a forward dividend yield of just over 5.3%.
Enbridge has 31 years of consecutive dividend growth under its belt. In other words, it's one of the pipeline stocks closest to becoming one of the Dividend Kings, or companies with 50 or more years of consecutive dividend growth. While Enbridge may have 19 years to go, much suggests it could hit this milestone. As discussed in an investor presentation last year, the company is pursuing around $50 billion in new growth opportunities through 2030.
4. Altria: High yield, with a smokeless catalyst
Altria Group, the parent company of Marlboro maker Philip Morris USA, is known as a "sin stock" because its business is tobacco products, including cigarettes and cigars. Shares have delivered strong, steady gains in recent years, thanks to the stock's high-single-digit dividend yield. Currently, Altria has a forward dividend yield of 6.3%.
Moving forward, this Dividend King, with 57 years of consecutive annual dividend growth, will likely keep growing its payouts each year, albeit at a low-single-digit pace. After all, the company is highly dependent on price increases to offset the secular decline in U.S. smoking rates.
But there may be a path to bolster growth, thereby fueling capital appreciation over time. The company has made inroads into the fast-growing nicotine pouch market, with its On! brand. If further efforts in "going smokeless" prove successful, steady gains in tandem with steady, growing dividends will create strong total returns.
5. Realty Income offers more than just monthly dividends
The defining feature of Realty Income is arguably its status as one of the best monthly dividend stocks. Each month, investors in this retail REIT receive distributions, making ownership of it similar to owning rental properties outright. Currently, shares have a forward yield of 5.1%.
Realty Income's dividend growth track record makes it a standout among monthly dividend stocks. The stock has increased distributions over each of the last 114 quarters. Thanks to its dividend growth policy, coupled with the steady appreciation of its globally diversified property portfolio, the stock has produced a total return of over 10,000% since going public in 1994, handily beating the S&P 500, which has produced total returns of around 2,600% during this same time frame.
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Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital, Brookfield Corporation, Enbridge, and Realty Income. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
