As inflation pressures ease and the Federal Reserve hints at potential rate cuts, the dynamics of income investing are likely to shift. With rate cuts on the horizon, dividend stocks — especially those offering high yields — are set to become increasingly appealing compared to traditional fixed-income assets, which may see yields decline.
Among the top dividend-paying stocks, Energy Transfer (ET) and Ares Capital Corporation (ARCC) stand out for their consistent dividend payment histories and high yields, exceeding 8%. These companies have shown a solid commitment to returning capital to shareholders. Moreover, they have earned a consensus “Strong Buy” rating from analysts, indicating strong prospects for dividend growth and stability.
With this background, let’s explore these two stock picks to understand why these high-yield dividend stocks could be excellent additions to your portfolio as we potentially move into a lower interest rate environment.
#1. Energy Transfer
Energy Transfer (ET), a leading energy infrastructure company in the U.S., stands out as an attractive choice for investors seeking high-yield dividend stocks. The company’s vast network is one of its key strengths. Energy Transfer owns and operates over 125,000 miles of pipeline and associated infrastructure across 44 states, strategically positioned in all major U.S. production basins. This extensive footprint enables the company to address rising energy demand, both domestically and in the international markets.
It’s worth noting that Energy Transfer is responsible for transporting approximately 30% of the nation’s natural gas (NGU24) and around 40% of its crude oil (CLU24) production.
Energy Transfer’s payouts are supported by its ability to grow its earnings consistently. The company's assets enjoy a high utilization rate due to exceptional geographic diversity, which supports its cash flows. Further, its high-quality customer base with strong credit profiles adds stability to its earnings. Plus, approximately 90% of Energy Transfers' earnings come from fee-based contracts. This revenue model helps mitigate the impact of commodity price volatility, ensuring a reliable income stream that supports its dividend payout ratio.
The company has a proven track record of returning value to its shareholders through higher dividends. At present, the company offers a quarterly dividend of $0.32 per share, resulting in an attractive yield of 8.1%. Looking ahead, Energy Transfer aims to grow its distributions by 3% to 5% annually, driven by acquisitions and organic growth. This demonstrates the company's strong commitment to maintaining and enhancing shareholder returns.
In an environment where interest rates are likely to decrease, Energy Transfer’s combination of a high yield, stable earnings, and dividend growth potential makes it an attractive option for income-focused investors.
The bullish sentiment among analysts further shows Energy Transfer’s appeal as an income stock. Of the 15 analysts covering Energy Transfer stock, 13 have issued a “strong buy” rating, one recommends a “moderate buy,” and one suggests a “hold.” This results in a consensus rating of “strong buy.”
#2. Ares Capital Corporation
For investors seeking reliable and high yield, Ares Capital Corporation (ARCC) stock could be a solid addition to their income portfolio. As a leading business development company in the U.S., it specializes in direct lending and investments to private middle-market enterprises.
Ares Capital’s diversified portfolio, flexible investment strategy, solid underwriting process, focus on less cyclical sectors, and durable balance sheet have been its strong points, enabling the company to generate solid earnings to support shareholder payouts. The company has scaled its operations with a range of investment solutions, leading to an increase in its assets under management (AUM). It’s worth noting that the company’s AUM has grown at a CAGR of 22% in the past five years.
Looking ahead, the large addressable market, secular shift towards private capital, and increased demand position Ares Capital well for continued growth and sustained dividend payments. The company paid and increased its dividends at a higher pace than peers over the past decade. Further, it currently offers a high yield of 9.3%.
The optimism surrounding ARCC is also reflected in Wall Street’s sentiment. Among 14 analysts in coverage, nine have given it a “strong buy” rating, three recommend a “moderate buy,” and two suggest holding the stock. This consensus view is “strong buy.”
The Bottom Line
As we transition into a lower interest rate environment, high-yield dividend stocks like Energy Transfer and Ares Capital Corporation offer a compelling alternative to traditional fixed-income assets. With their strong dividend histories, solid financials, and high yields, these companies are well-positioned to deliver attractive returns for income-focused investors.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
