ARCC - Up To 10% Yields: 3 Top High Dividend Growth Stocks For June 2023

2023-06-08 08:00:00 ET

Summary

• Dividend growth investing is a very powerful wealth-building tool.
• It enables investors to overcome psychological pitfalls, turbocharge their wealth compounding, and ultimately outperform the market over the long term.
• We share three compelling high yielding dividend growth opportunities that are on sale at the moment.

Dividend growth investing is a great way to build long-term wealth for three reasons:

1. It helps you stay focused on intrinsic value instead of getting caught up in the chaos of market volatility. By focusing on the dollar count of your annualized passive income stream, you can keep calm and collect dividends even when the market is crashing.
2. It applies compounding to your compounding, resulting in exponential growth of your passive income stream. By investing in dividend growth stocks and then reinvesting your dividends into dividend growth stocks, you not only enjoy the power of compound interest, but your yield on cost also increases as your dividends per share grow simultaneously with the growth in your number of shares. This leads to turbocharged income growth.
3. Last, but not least, dividend growth stocks such as those commonly found in popular ETFs like the Schwab U.S. Dividend Equity ETF ( SCHD ) have a proven track record of outperforming the market ( SPY ) over the long term:

In this article, we will look at three very attractively priced dividend growth stocks for June 2023 with dividend yields of up to 10%:

#1. Realty Income Stock ( O ) - 5% Yield

Realty Income is a leading triple net lease REIT that acquires single tenant retail properties and leases them to tenants responsible for recurring property expenses. This strategy ensures consistent profit margins, resulting in high occupancy rates and resilience during economic downturns like the Great Recession and COVID-19 lockdowns.

With 12,492 properties and 1,259 tenants across 84 industries, Realty Income holds a notable competitive advantage as the largest triple net lease REIT and the fourth largest global REIT. Their diversified portfolio is bolstered by a defensive approach, with approximately 91% of total rent coming from tenants resistant to economic recessions and e-commerce disruption. Additionally, around 41% of rent is derived from investment-grade tenants.

Realty Income benefits from an A- credit rating, granting them access to debt at lower costs compared to competitors like EPRT. This advantage allows them to achieve superior risk-adjusted spreads on their investments. The company maintains a strong balance sheet with well-laddered debt maturities and a low percentage (10%) of floating rate debt. Moreover, around 95% of their debt is unsecured, indicating a favorable risk profile. Solid financial metrics, including a fixed charge coverage ratio of 4.6x and a net debt to annualized pro forma adjusted EBITDA ratio of 5.4x, further underscore the company's robust financial position.

With such an impressive portfolio of assets and rock solid balance sheet, its attractive 5% dividend yield appears very safe for the foreseeable, while its lengthy and impressive dividend growth track record that makes it a Dividend Aristocrat ( NOBL ) as well as its proven ability to deliver market-crushing total returns makes it a compelling dividend growth buy right now:

#2. Enterprise Products Partners Stock ( EPD ) - 7.5% Yield

Enterprise Products Partners is considered by many to be the gold standard of midstream infrastructure businesses. What makes it stand out in particular is its industry-leading A- credit rating and a highly conservative leverage ratio of 3.0x, demonstrating its strong financial standing. Additionally, the company has a remarkable track record of consistently increasing its distribution every year for nearly 25 years, reflecting its commitment to delivering value to investors. As a result, it should be unsurprising that it has delivered market-beating total returns over the long-term despite operating in a sector that has struggled to do so:

EPD's success is further supported by its well-diversified portfolio of high-quality assets. These assets generate stable cash flows and offer attractive returns on invested capital. The company consistently achieves solid low to mid-single digit per unit growth on an annual basis, showcasing its ability to drive sustainable growth.

Looking ahead, EPD is set to continue generating solid cash flow and distribution growth (likely at around a mid single digit CAGR) thanks to a promising slate of growth projects currently in its pipeline:

Considering EPD's stable cash flows, robust balance sheet, and promising growth prospects, and its 7.5% distribution yield, it is hard to imagine a more attractive risk-adjusted high yield distribution growth stock in the market today.

#3. Ares Capital Stock ( ARCC ) - 10% Yield

Last, but not least, our highest yielding dividend growth stock for today is ARCC. While the 10% dividend yield may scare some investors at first glance by assuming it is a high risk, poorly managed company, the long-term track record should put those concerns to ease:

Moreover, despite paying out almost all of its income as dividends (due to it being a Business Development Company ( BIZD ), which makes it income tax-exempt at the corporate level), ARCC has done a remarkable job of growing its book value per share over the long-term:

This means that ARCC is not only fully covering its hefty dividend payout with its underwriting skill, but it is actually growing book value for shareholders on top of the dividends through successful equity investments, some retained earnings, and prudent issuing of shares at opportunistic premiums to NAV which it then reinvests skillfully into loans that drive per share earnings and dividend growth.

In its recent Q1 report , ARCC highlighted several positive developments. First, its book value per share increased by $0.05 sequentially, benefiting from unrealized gains in the portfolio and retained earnings net of dividend payments. On that note, the dividend coverage remained strong, with net investment income covering the dividend by approximately 1.24x. Additionally, the combination of spillback income further contributes to ARCC's stable dividend outlook.

ARCC also demonstrated significant improvement in its leverage ratio, which decreased from 1.26x in Q4 2022 to 1.09x in Q1. Furthermore, the company's net interest margin improved by 10 basis points to 750 basis points thanks to rising interest rates and its higher concentration of fixed-rate debt on its balance sheet, enabling a more rapid expansion of net interest margin when interest rates rise.

While non-accruals experienced a slight increase, they remained at a low 1.3% of fair value. This reflects ARCC's robust underwriting capabilities and commitment to maintaining a high-quality portfolio.

Not only did ARCC sustain its dividend through the COVID-19 lockdowns, but it has grown its quarterly base dividend per share by 20% over the past two years alone. This is an exemplary dividend growth rate for such a high yielding stock, especially when you add in the substantial special dividends it has also distributed to shareholders over that period. With the stock trading roughly in-line with NAV at the moment and the yield looking safe and sitting at over 10%, ARCC looks like a compelling buy for a high yielding dividend growth portfolio. You can read our full investment thesis here and our exclusive interview here .

Investor Takeaway

Dividend growth investing is a proven long-term wealth building technique that works for investors of all ages and stations in life. Right now - with interest rates likely peaking and stock prices suppressed due to recession fears - is a great time to start building a dividend growth portfolio with blue chip recession resistant stocks like O, EPD, and ARCC. This way you lock in very attractive current yields while also being able to sleep well at night that the dividend should remain intact even if the economy does slide into a slight recession. At High Yield Investor, we are buying these types of stocks aggressively right now and look forward to continued outperformance and lucrative passive income for years to come.

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