Major stock indexes are up sharply this year, but not all major stocks have participated in the rally. Right now, there are a handful of struggling dividend payers that offer ultra-high dividend yields.
A high dividend yield This is generally a good sign that a company is in trouble and will not be able to increase its payouts even further. These three stocks stand out because they offer huge initial returns, and there’s a good chance they could increase their payouts even further in the years to come.
Read on to find out why adding these stocks to your portfolio in June could generate huge passive income by the time you’re ready to retire.
1. AT&T
AT&T (NYSE:T) has sold off the last of its unpredictable media assets in 2023 and reduced its dividend payout accordingly. The stock, however, has fallen enough to still offer a 6.4% dividend yield at recent prices.
Now that it’s purely a telecommunications business, cash flows could be relatively predictable. As one of three 5G wireless network providers in America, income-seeking investors can reasonably expect these cash flows to increase steadily in the years to come.
AT&T was losing wired broadband customers to fixed wired and wireless solutions from Verizon And TMobile. Late last year, the company finally launched a fixed wireless broadband service for people who aren’t near its fiber-optic cables.
In response to the success of a fiber optic service and a new fixed wireless service, management expects total broadband revenue to increase more than 7% this year.
2. Ares Capital
With a portfolio valued at approximately $23 billion, Ares Capital (NASDAQ:ARCC) is the largest publicly traded market business development company (BDC). These specialized entities are essentially lenders to mid-sized businesses, typically too small to attract the attention of major U.S. banks.
At recent prices, Ares Capital offers a dividend yield of 9%, and that figure could rise. Many mid-market businesses lack capital and are willing to pay high interest rates for secured loans.
In the first quarter, Ares earned an average return of 12.4% on the debt-related securities in its portfolio. Cautious investors will be happy to know that 59% of its assets are first and second lien secured loans, which are the first to be repaid if a borrower files for bankruptcy.
Inflation and rising interest rates are making it even more difficult for Ares Capital borrowers to repay their debts. Fortunately, BDC’s underwriting team is skilled at selecting borrowers with strong cash flow. Unaccounted loans decreased year-over-year to $397 million, or just 1.7% of the total portfolio at cost.
3. Hercules Capital
Capital Hercules (NYSE:HTGC) is another BDC, but it operates very differently from Ares Capital. Hercules provides numerous loans ranging from $25 million to $100 million to start-ups with disruptive technologies.
Many of Hercules Capital’s investments will not be profitable, but those that are can more than offset losses. For example, in the first quarter, four of its portfolio companies signed merger and acquisition agreements. Also during the first quarter, two portfolio companies submitted 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 increased steadily since 2010. This also provides shareholders with an additional distribution which can change from year to year. The current additional quarterly dividend is $0.08 per share. If it remains stable, investors who buy the stock at recent prices will receive a 9.9% return.
Hercules Capital’s overall dividend may not increase linearly, but in five years its long-term investors will likely receive a return well above 9.9% of their initial investment. Assets under management increased 14.7% year over year as BDC deployed record levels of capital in the first quarter.
Should you invest $1,000 in AT&T right now?
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Cory Renauer holds positions within Ares Capital. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
3 High-Yielding Dividend Stocks to Buy in June and Hold for a Decade or More was originally published by The Motley Fool
