Most stocks don’t offer attractive dividends these days, with yields at S&P 500 near a ten-year low of about 1%. Investors looking for higher yields often need to take on more risk, including greater chances of future dividend cuts.
However, there are low-risk, high-yield investment options if you don’t know where to look. Here are three companies that yield more than 8%. Those high yields can enable investors to turn $1,000 into profitable income that can last a lifetime.
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Starwood Property Trust Company
Starwood Property Trust Company (NYSE: STWD) is a real estate investment trust (REIT). These companies must distribute at least 90% of their taxable income to investors to comply with IRS rules. As a result, many REITs have high yields. Starwood’s is currently around 11.5%. At that rate, a $1,000 investment would generate $115 in annual dividend income.
The REIT has never reduced its dividends since its 2010 IPO and has maintained its current payout rate since 2014. One of the keys to Starwood’s dividend strength is its diversification. The mortgage REIT invests in real estate-based mortgages (52% of its portfolio), infrastructure loans (10%), residential loans (8%), and several other assets (10%). It also has a growing portfolio of owned properties (20%).
Starwood’s latest move to diversify was the acquisition of real estate rental platform Fundamental Income Properties for $2.2 billion last year. It owns an expanding portfolio of properties secured by long-term leases (weighted average lease term of 17 years and 2.2% average annual rent increase). The platform will provide Starwood with incremental revenue to support its high-yielding dividends.
Main Street Capital
Main Street Capital (NYSE: MAIN) is a business development company (BDC). Like REITs, BDCs must distribute at least 90% of their taxable income to comply with IRS rules. As a result, they usually give a high yield.
Main Street meets this requirement by paying two dividends. BDC paid dividends every month at a constant rate. As a result, Main Street has never lowered its monthly dividend. Instead, it has increased this payout by 160% since its 2007 IPO, including the last 12 consecutive quarters. Additionally, Main Street occasionally pays additional quarterly dividends to meet its required payout ratio. it has paid dividends for 19 straight quarters. At the current annualized rate of these two payouts, Main Street is yielding more than 8.5% at its latest price.
A BDC primarily invests in loans to small private companies, generating interest income that it pays out in dividends. Additionally, Main Street Capital will make equity investments in some of its portfolio companies, which provide dividend income and potential appreciation. These investments have helped contribute to its long-term profit growth.
Western Midstream Partners
Western Midstream Partners (NYSE: WES) is a master limited partnership (MLP). These pass-through businesses (MLPs that file a Schedule K-1 Federal tax form each year) tend to have higher profit margins due to their higher payout ratios and lower valuations resulting from the tax burden of K-1s.
MLPs operate oil and gas pipelines, processing plants, and other midstream energy infrastructure. These assets generate stable cash flows backed by long-term contracts. That predictable cash flow supports Western Midstream’s dividend yield of more than 8.5%.
The company increased its payout by 184% from 2021, following a 2020 payout reset aimed at strengthening its financial profile. It aims to deliver low to medium annual distribution growth going forward, fueled by organic projects and acquisitions. Western Midstream plans to spend $850 million to $1 billion on maintenance and expansion projects this year, including construction of the Pathfinder Pipeline and the North Loving II gas processing facility. Additionally, it agreed to spend $1.6 billion to buy Brazos Delaware to strengthen its midstream portfolio. These investments support its growing distribution.
Low risk, high yield investment
Businesses like REITs, BDCs, and MLPs often offer high dividend yields. That makes them attractive options for investors looking for profitable income streams. Starwood Property, Main Street Capital, and Western Midstream Partners have strong records of paying sustainable dividends, making them ideal investments for those looking to turn $1,000 into a steady stream of income.
Should you buy stock in Main Street Capital right now?
Before buying stock in Main Street Capital, consider the following:
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Matt DiLallo holds positions in Main Street Capital and Starwood Property Trust. The Motley Fool has positions in and recommends Starwood Property Trust. The Motley Fool has disclosure policy.
3 Stocks Yielding Over 8.5% to Buy for $1,000 Right Now — and Hold a Lifetime of Income was originally published by The Motley Fool.
