There are loads of ways to generate passive income. One of the best ways to supplement portfolio growth is to seek out dividend stocks.
But when it comes to dividend income, did you know that some opportunities may be more reliable than others?
Let's break down five companies that are established dividend payers, and assess why holding each of these stocks over a long-term time horizon can lead to massive gains for your portfolio.
1. Hercules Capital
Hercules Capital (HTGC 1.15%) is a business development company (BDC). BDCs are a reliable source of dividend income because these companies are required to pay out at least 90% of their taxable income to investors each year.
While there are many types of BDCs, Hercules primarily focuses on high-yield loans to start-ups in the technology, life sciences, and renewable energy industries. Although start-ups can be risky, Hercules has demonstrated that it employs robust due diligence processes before making an investment. Over the years, the company has worked with notable businesses including Impossible Foods, Enphase Energy, and Lyft.
The company's consistent rise in net interest income undermines Hercules' strong performance and its proven ability to reward shareholders.
HTGC Net Interest Income (Quarterly) data by YCharts
Over the last 10 years, Hercules stock has a total return of 275%. Not only does this emphasize the importance of reinvesting dividends, but it also highlights that Hercules has been a lucrative investment over the long run.
With its juicy dividend yield of 10.4%, now could be a great opportunity to scoop up shares in Hercules stock.
Image source: Getty Images.
2. Ares Capital
Another prominent BDC is Ares Capital (ARCC 0.52%). Unlike Hercules, Ares doesn't typically work with high-profile tech companies that have raised funds from venture capital firms.
Rather, many of the companies in Ares' portfolio are lower middle market businesses that go overlooked by investment banks or private equity investors.
Moreover, while Hercules specializes in basic debt instruments such as term loans or revolvers (think a corporate line of credit), Ares offers more sophisticated products -- including leveraged buyouts (LBOs).
ARCC Price to Book Value data by YCharts
At a price-to-book (P/B) ratio of just 1.1, Ares stock is trading essentially in line with its 10-year average. Considering the company's total return has outperformed the S&P 500 over the last three- and five-year periods, I think now looks like a great time to buy some shares in Ares at a 9.3% yield and prepare to hold for the long-run.
3. Rithm Capital
Real estate investment trusts (REITs) are another great source of dividend income.
Rithm Capital (RITM 0.80%) is a REIT that specializes in financial services including loan origination, as well as commercial real estate and single-family rentals.
One drawback that investors may see with Rithm is the company's exposure to broader themes in real estate. Indeed, lingering inflation and high borrowing costs have affected consumers, businesses, and even home owners or renters. For me, the biggest mark is what Federal Reserve will decide to do regarding interest rates this year.
The chart below illustrates how these macroeconomic variables can impact Rithm's business specifically. While the dividend is lower than it was in years past, I think the bigger idea is that holding for the long-term could be a good decision.
RITM Dividend data by YCharts
With the stock trading at less than $11 per share, now could be a tempting time to consider buying some shares at a 9.2% yield and the possibility of a rising dividend depending on the broader macro environment.
4. Energy Transfer
Outside of financial services, investors can find lucrative sources of dividend income from the energy sector. Energy Transfer (ET 0.32%) is a master limited partnership (MLP) operating in the natural gas industry.
MLPs have an interesting operating structure because these entities pass income and losses along to their investors. This can be an attractive feature for income investors.
MLPs also tend to distribute excess profits to limited partners (LPs). These payments are known as distributions and are similar to dividends.
One risk worth pointing out is that the energy sector can experience more pronounced volatility than other sectors. For example, current geopolitical conditions in Europe and the Middle East have greatly affected legislative policy surrounding the energy industry.
However, Energy Transfer is more insulated from these risks. A common theme among MLP's is that these companies often enter long-term fixed fee contracts with their customers. In essence, this provides Energy Transfer with far less exposure to commodity-based risk when compared to other types of energy businesses.
The chart below illustrates Energy Transfer's free cash flow over the last 10 years. While it's improved dramatically over the last decade, trends in more recent years do show that even steadier businesses such as MLP's can experience some level of volatility.
Nevertheless, Energy Transfer has made it a point to raise its distributions to historically high levels. I think this showcases management's decisions to prioritize shareholders.
ET Free Cash Flow (Quarterly) data by YCharts
5. Enterprise Products Partners
The last company on my list is midstream energy specialist Enterprise Products Partners (EPD 0.63%).
Earlier this year, Enterprise Products Partners announced that it was acquiring joint venture interests from Western Midstream Partners. In early April, the company also announced that it was breaking ground on a series of new natural gas plants in the Permian Basin. Among all of its projects, Enterprise Products Partners has roughly $6.5 billion of approved new business currently under construction.
What I like most about Enterprise Products Partners is the company's ability to navigate challenging economic periods while still rewarding shareholders. Over the last 15 years, the economy has witnessed the 2008-2009 Great Recession, prolonged cratering oil prices between 2014 and 2016, and most recently the COVID-19 pandemic.
During, this time, the company's adjusted cash flow from operations (CFFO) has rise from $1.29 per unit at the end of 2009, to $3.70 by the end of 2023. Given the company's 7.1% yield and strong performance in the long-run, now could be an interesting time to consider buying some shares.
