Investors love dividend stocks, especially the ultra-high-yield variety because they offer a significant income stream and have massive total return potential. Total return includes interest, capital gains, dividends, and distributions realized over time. In other words, the total return on an investment or a portfolio consists of income and stock appreciation. Let’s take a closer look at the concept of total return. Imagine you purchase a stock at $20 that offers a 3% dividend. If the stock price rises to $22 within a year, your total return is 13%. This is calculated by adding the 10% increase in stock price to the 3% dividend.
Passive income is characterized by its ability to generate revenue without requiring the earner’s continuous active effort, making it a desirable financial strategy for those seeking to diversify their income streams or achieve financial independence. The more passive income can help cover costly and rising costs like mortgage, insurance, taxes, and other expenses, the easier it is for investors to put away money for future needs as they build to retirement.
According to the Internal Revenue Service (IRS), passive income generally includes earnings from rental activity or any trade, business, or investment in which the individual does not materially participate.
We screened our 24/7 Wall St. passive income stock database, looking for companies paying ultra-high-yield dividends. We purposely avoided the mortgage REIT funds and focused on sectors that have been either out of favor or overlooked by most of Wall Street. Three top stocks made the cut, and all are reasonable, safe ideas for growth and income investors with a higher risk tolerance.
Why do we cover ultra-high-yield stocks?
While not suited for everybody, those trying to build strong passive income streams can do exceptionally well with some of these top companies in their portfolios. Paired with more conservative blue-chip dividend giants, investors can use a barbell approach to create significant passive income streams.
Arbor Realty Trust
Arbor Realty Trust offers nationwide solutions for multifamily finance.
This stock trades at a ridiculous 7.7 times estimated 2026 earnings and pays a massive 15.02% dividend. Arbor Realty Trust (NYSE: ABR) invests in a diversified portfolio of structured finance assets in the multifamily, single-family rental, and commercial real estate markets in the United States.
The company operates in two segments:
- Structured Business
- Agency Business
Arbor Realty Trust primarily invests in:
- Bridge and mezzanine loans, including junior participating interests in first mortgages
- Preferred and direct equity and real estate-related joint ventures
- Real estate-related notes
- Various mortgage-related securities
The company offers:
- Bridge financing products to borrowers who seek short-term capital to be used in an acquisition of property
- Financing by making preferred equity investments in entities that directly or indirectly own real property
- Mezzanine financing in the form of loans that are subordinate to a conventional first mortgage loan and senior to the borrower’s equity in a transaction
- Junior participation financing in the form of a junior participating interest in the senior debt
- Financing products to borrowers seeking conventional, workforce, and affordable single-family housing.
Mach Natural Resources
Mach Natural Resources is an independent upstream oil and gas company that acquires, develops, and produces oil, natural gas, and NGL.
This 2023 IPO is trading well below the initial offering price. Mach Natural Resources L.P. (NYSE: MNR) recently conducted a secondary offering to purchase more producing assets. The company pays a massive 14.71% dividend.
Mach Natural Resources is an independent upstream oil and gas company focused on acquiring, developing, and producing oil, natural gas, and natural gas liquids reserves in the Anadarko Basin region of Western Oklahoma, southern Kansas, and the Texas panhandle.
The analysts at Raymond James note that Mach is led by Tom Ward, co-founder of Chesapeake Energy. Mach is another entrant into the E&P MLP space. It is a pure-play operator in the Anadarko Basin, leveraging its strong position (1 million net acres) to become the primary consolidator in the region.
Mach’s midstream position and lower base decline (~20%) allow the company to target a lower reinvestment rate (~30%) relative to the overall industry. In addition, it is one of the only exploration and production companies organized as a limited partnership as it is an oil and gas producer.
Runway Growth Finance
Runway Growth Finance Corp. seeks to be the leading non-bank lender to late/growth stage venture companies.
This business development company (BDC) pays a stunning 17.4% dividend and has a solid Wall Street following. Runway Growth Finance Corp. (NASDAQ: RWAY) is a BDC specializing in investments in senior secured loans to late-stage and growth companies.
The company prefers to invest in companies engaged in:
- Technology
- Life sciences
- Healthcare
- Information services
- Business services
- Select consumer services and products sectors
Runway Growth Finance prefers investments in companies engaged in:
- Electronic equipment and instruments
- Systems software
- Hardware, storage and peripherals
- Specialized consumer services,
- Application software
- Healthcare technology
- Internet software and services
- Data processing and outsourced services
- Internet retail, human resources, and employment services
- Biotechnology, healthcare equipment, and education services
It typically invests between $10 million and $75 million in senior secured loans.
Compass Point has a Buy rating with a $12.75 target.
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