These six dividend stocks are very attractive because they have yields of over 5%. But they are also good investments, as the companies earn more on a monthly yield basis than the dividends they pay out to shareholders.
This latter point is very important. Often business development companies, which are a mix of a lender to small companies and a private equity firm, pay dividends that they cannot afford. In fact, they end up calling these “distributions” rather than dividends, since the amount that they can’t afford is actually a return of capital (ROC).
In the end, high-yield ROC stocks tend to fall in price. This is because you can’t fool the market. It knows that a company’s cash flow or weighted-average yield does not cover the dividend payments. The stocks on our list don’t have this problem, and this makes their stock price performance more secure.
Let’s dive in and look at these dividend stocks.
|NMFC||New Mountain Finance||$12.17|
Gladstone Capital (GLAD)
Dividend Yield: 7.3%
Gladstone Capital (NASDAQ:GLAD) is a business development corporation (BDC), which is sort of like a bank that makes loans to companies. It makes loans, collects the interest and pays it out to shareholders after deducting admin costs. The key here is whether the amount it earns in interest is greater than what it pays out.
Right now, its dividend at 81 cents per share yields 7.3% at today’s price of $10.40. But more importantly, its weighted-average yield earned by the company was 10.3% in the last six months. This can be seen on page 49 of the 10-Q and also in its second quarter fiscal earnings press release on May 3.
This is higher than the company’s current 7.3% yield to investors. But to make this comparison more exact, we need to adjust for the fact that GLAD stock is 9.6% over the company’s net asset value (NAV). As of March 31, the book value or net assets, after deducting all liabilities, is $9.49 per share.
Since investors are paying more than the NAV, we have to reduce the company’s 10.3% weighted average. The equivalent yield earned by the company is 9.4%. This is calculated by dividing 10.3% by 1.096. This more than covers the 7.3% yield.
One more thing. This company pays out monthly dividends. That makes this one of the more attractive dividend stocks on this list.
Prospect Capital (PSEC)
Dividend Yield: 9.5%
Prospect Capital Corporation (NASDAQ:PSPC) is also another BDC. The stock yields 9.5% annually and pays out its dividends on a monthly basis. The annualized yield of its investments for the last nine months at the end of Q3 was 8.4%. In addition, its price at $7.21 price is just 67% of its $10.81 NAV at the end of 2021.
After adjusting for its 67% price-to-NAV ratio, the adjusted portfolio yield is 12.5%. This is much higher than its 8.1% distribution yield to investors.
As a result, investors in Prospect Capital should be confident that the company can keep paying its high 9.5% dividend yield. Of course, as the price rises, the yield will fall, and the spread of the company’s portfolio yield over the yield to investors will narrow.
New Mountain Finance (NMFC)
Dividend Yield: 9.5%
New Mountain Finance Corp is a BDC that focuses on private equity buyouts and related loans and general lending to middle-market firms. The stock is very attractive as it yields 9.5%, and this appears to be covered by its portfolio investment yield.
Moreover, at $12.17, NMFC stock trades for just 90% of its NAV at $13.56 per share as of March 31. That alone makes this a good investment worth buying.
In addition, New Mountain Finance generates enough income to cover its payments. One way to see is that the company reports that its yield-to-maturity at cost is approximately 9.8%. That is higher than the 9.5% dividend yield to investors.
Moreover, after adjusting this figure for the 93.4% price-to-NAV, the adjusted portfolio yield is 11%. In other words, by buying below the book value, the investment yield is below the portfolio yield on a comparable adjusted basis of about 150 basis points.
This makes NMFC stock one of the better dividend stocks on this list.
Verizon Communications (NYSE:VZ) is a 5G wireless company that now yields 5% with its annual $2.56 annual dividend payment.
Verizon is likely to declare another dividend increase at its next dividend announcement sometime at the end of August. This is because it has now paid the same 64-cent quarterly dividend for the past three quarters (with another payout coming up in July) and for the past 18 years, Verizon has raised its dividend.
VZ stock is also cheap at 9.4 times earnings, according to Seeking Alpha. And since earnings are forecast to grow 3.1% in 2023 to $5.57, its price-to-earnings (P/E) multiple falls to 9.12 times.
This also shows that the $5.57 earnings per share (EPS) estimate for 2023 is more than sufficient to cover the annual $2.56 dividend payment and increase that might occur.
This makes VZ one of the best dividend stocks out there right now. That is especially the case, since it is an operating company and not a business development company. An operating company has a much more robust revenue and expense reality than a BDC.
Dividend Yield: 5.4%
AT&T (NYSE:T) has completed the spinoff of its WarnerMedia division and merged it with Discovery to form Warner Bros Discovery (NASDAQ:WBD). This makes it a pure wireless telecom stock with earnings set to hit $2.56 per share this year and $2.52 in 2023, its first full year on a standalone basis.
AT&T’s $1.11 dividend per share provides a yield of 5.4% at today’s price. This also makes T stock one of the highest-yielding telecom dividend stocks.
The company’s earnings are partially depressed by the spinoff costs and its reorganization and cost-cutting as a focused wireless company. That should improve over the next several years. Therefore, investors can expect that this will be one of the better dividend stocks.
Dividend Stocks: BCE (BCE)
Dividend Yield: 5.5%
BCE (NYSE:BCE) is a Canadian telecom, media and internet broadband company. Analysts forecast that earnings will hit $2.66 this year, up 11% from $2.39 last year. Moreover, they forecast a 5.6% higher EPS in 2023 to $2.81.
BCE’s dividend is paid in CAD. In 2021, it paid 3.50 CAD, currently the equivalent of $2.71.
There is no guesswork here. The company has already posted that it plans on paying 92 cents CAD quarterly for the next three quarters. Given that the U.S. dollar exchange rate is currently 78 cents per CAD, that approximates 71 cents and change before any fees.
Nevertheless, this just barely meets the cutoff criteria, as its payout ratio is about 100% (maybe slightly over that). That makes it one of the viable dividend stocks on this list.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.