There is good news for investors who believe that generating reliable passive income precludes you from growth opportunities. The reality is that you don’t have to make a tradeoff between growth and income. There are ways to generate passive income and enjoy potential capital appreciation. Here are three dividend stocks that Wall Street loves.
Banks Created A Huge Void That Ares Capital Is Filling
Ares Capital Corporation (NASDAQ: ARCC | ARCC Price Prediction) is an investment company regulated by the SEC that operates as a “Business Development Company.” This gives it preferential tax treatment and obligates it to adhere to certain rules.
One is that Ares is required to invest at least 70% of its assets in smaller private and public companies. Ares is one of the largest direct lenders in the country and this creates opportunity for it.
Ares can charge higher fees to smaller businesses. That’s good news for investors because Ares is also required to distribute 90% of its profits to shareholders.
Ares’ dividend is currently $1.92. With the stock selling for about $22, that puts its yield right around 9%. Importantly, Ares has paid a dividend continuously since 2009 and has raised it five times in the last five years.
The majority of analysts who follow Ares Capital recommend it as a “Strong Buy.” There are no “Sell” recommendations on the stock right now.
The growth opportunity in Ares results from banks generally retreating from middle market lending at a time when demand is rising. Companies that had traditionally looked to banks for capital are increasingly turning to direct lenders like Ares.
Growth Is In CTO Realty’s Name Because It Leverages Population Trends
CTO Realty Growth, Inc. (NYSE: CTO) is a real estate investment trust (REIT) that owns retail properties in eight states from North Carolina to Arizona. Its focus is to make investments in growing markets.
Some of CTO Realty’s properties are anchored by huge grocers like Publix or big-box stores like Home Depot (NYSE: HD). Smaller centers are anchored by grocers like Whole Foods or specialty retailers like J. Crew.
REITs must distribute the majority of their earnings to investors. CTO Realty targets its dividend payout ratio at 100% of taxable income. Right now, its dividend is 1.52, putting the yield above 8.5%.
CTO Realty looks for opportunities in markets where population growth is rising faster and where incomes are a multiple of the national average. This leads to strong tenant demand and stable and rising leasing revenues.
And Wall Street loves CTO Realty. The average rating on the REIT is 1.5 – a solid “Buy.” Those analysts also have a year-ahead average price target about 11% higher than CTO Realty’s current share price.
Entergy Also Benefits From Population Growth
Investors looking for passive income and an opportunity for potential capital appreciation might also consider Entergy Corporation (NYSE: ETR).
Entergy is an electric power utility that serves more than 3 million customers in Arkansas, Louisiana, Mississippi, and Texas. Here’s where Entergy’s potential growth comes from.
Right now, the South is experiencing the fastest population growth in America. Some 1.4 million people moved there last year. Entergy’s operating market gets a significant portion of that in-migration.
Along with the upward shift in population comes growth in commercial and industrial electricity use. Entergy has experienced electricity demand increase by an average of about 7% annually since 2022. It expects industrial use to grow at about 10% annually through 2026.
Analysts on Wall Street estimate that this will drive Entergy’s earnings higher by about 7.5% annually into the foreseeable future. There are 10 “Strong Buy” recommendations on Entergy right now. The average rating analysts on it is 1.77.
Entergy has paid a dividend every quarter since 1994. It has raised it nine times in the last 10 years. Those increases represent an average annual growth rate that has outpaced inflation by more than 11%.
Entergy’s stock price is about $112 right now. That puts the yield on its $ 4.52 dividend at just over 4%.
Why Investors Should Consider Ares Capital, CTO Realty, And Entergy
Investors looking for passive income can enjoy very attractive dividend payouts in Ares Capital, CTO Realty, and Entergy. As an added bonus, the underlying businesses of each of these companies seems poised for future growth that could augment the dividend income.
In each case there is the potential for double-digit total returns.
Top Gaining Stocks
Top Losing Stocks