When economic growth is uncertain, investors often turn to the reliability of dividend stocks to see them through. With the Federal Reserve entering into a new rate-easing cycle, it indicates the economy is not as healthy as we were told. So buying dividend stocks is a great way to help insulate your portfolio if things quickly turn south. 

Several years ago, analysts at JPMorgan Chase‘s (NYSE:JPM) asset management unit found stocks that initiated and then raised their payouts over the 40-year period between 1972 and 2012 returned an average of 9.5% annually, versus just 1.6% non-dividend-paying stocks.

Similarly, Hartford Funds looked at the performance of the S&P 500 from 1960 onward and discovered dividends represented 85% of the index’s total return. A $10,000 investment in the S&P benchmark back then would have resulted in gains equal to $796,432, but reinvesting dividends accelerated those returns resulting in that same $10,000 transforming into $5.1 million.

While you might be tempted to buy high-yielding stocks to juice your returns even more, simply chasing yield is a risky pursuit because many stocks with higher yields often carry higher risk. But that doesn’t apply to every high-yield stock, so an investor needs to pick and choose with care which ones they invest in. 

The following two dividend stocks are not only solid high-yield income stocks, but in the Fed’s new not-quite-so-easy-money era, they offer significant growth potential and our 2 excellent dividend stocks to buy in October. 

Key Points About This Article:

• Interest rates are starting to fall, which could be extremely beneficial to these ultra-high-yield dividend stocks that were hampered by the previous “higher for longer” monetary policy.
• Yet don’t go chasing yield for yield’s sake, as ultra-high-yield stocks often come with a host of problems. Being very selective is key to investment success and these two stocks are primed for greatness.
• Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “2 Legendary High-Yield Dividend Stocks” now.

Ares Capital (ARCC)

Business development company (BDC) Ares Capital (NASDAQ:ARCC) is the largest, publicly-traded stock of its kind. It owns 525 middle-market businesses worth $25 billion. 

Ares seeks out companies with experienced management teams that have a proven history of delivering stable cash flows, while possessing identifiable growth opportunities. Almost one-quarter of its investments are in technology companies while another 13% are healthcare businesses.

Because BDCs are highly leveraged and have to borrow money in order to lend to companies at higher rates, the Fed’s “higher for longer” interest rate policies hurt Ares’ performance. ARCC stock is up 4% in 2024 and only 6% higher over the last 12 months. A lower-rate environment will drill down directly to its bottom line.

Similar to real estate investment trusts (REIT), BDCs are required to pay out at least 90% of their taxable income as dividends to shareholders. Ares offers investors a solid decade of base-dividend growth exceeding 26%. It has also generated an uninterrupted string of cumulative core earnings and net realized gains well above the dividends paid going back to 2007. Its dividend yields 9.2% annually.

With lending market conditions improving, Ares Capital is poised for a new run higher.

Modiv Industrial (MDV)

Modiv Industrial (NYSE:MDV) is a REIT that focuses on single-tenant properties, primarily in the industrial manufacturing market. It is also the only public REIT focused exclusively on the industrial market. Its largest tenant is farm and heavy equipment manufacturer Lindsay (NYSE:LNN), which represents almost 15% of its rental income. Overall, Modiv has 43 properties across 15 states representing 29 tenants.

The REIT only went public in 2022, but is already showing signs of greatness. Unlike most REITS, Modiv pays a dividend every month (“Modiv” stands for “monthly dividend”), which yields 6.9%. Its dividend coverage ratio, or the number of times a company can pay shareholders its dividend using net income, stands at 110%. While management has said it won’t be raising the payout anytime soon, it has made almost 100 consecutive distributions. 

Just like Ares Capital, the REIT requires capital to invest in properties, making the high-rate environment of the past few years a difficult time to navigate. Yet MDV stock is up 22% year-to-date and with rates scheduled to fall going forward, expect Modiv Industrial to be a sure-fire winner.

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