The Russell 2000 is a stock market index that tracks the performance of approximately 2,000 small-cap companies in the United States. It is part of the broader Russell 3000 Index, which covers about 98% of the U.S. equity market, but specifically focuses on smaller companies with market capitalizations typically ranging from $300 million to $2 billion. These firms are often considered riskier but can offer higher growth potential compared to larger, more established companies.
Historical data shows that small-cap stocks tend to lead in the years following major market downturns. For example, after the 2008 financial crisis, the Russell 2000 significantly outperformed the S&P 500 from 2009 to 2011. However, small caps can underperform during recessions or high uncertainty due to their higher risk and lower liquidity. While our recent sell-off does not qualify as a significant market meltdown, many of the highest-yielding stocks in the Russell 2000 are offering intriguing entry points.
We screened the Russell 2000 index for the highest-yielding stocks and identified four that appear to be outstanding passive income ideas now. Passive income is characterized by its ability to generate revenue without requiring the earner’s continuous active effort. This makes it a desirable financial strategy for those seeking to diversify their income streams or achieve financial independence.
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 employ a barbell approach to generate substantial passive income streams.
Arbor Realty Trust
Arbor Realty Trust (NYSE: ABR) offers nationwide solutions for multifamily finance. This stock trades at a ridiculous 7.6 times estimated 2026 earnings and comes with a massive dividend. Arbor Realty 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 the 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
Furthermore, it underwrites, originates, sells, and services multifamily mortgage loans through conduit and commercial mortgage-backed securities programs.
JMP Securities has a Market Outperform rating with a $15 target price.
Ellington Financial
Ellington Financial Inc. (NYSE: EFC) has been at the forefront of data-driven investing since its founding in 1994. This high-quality mortgage REIT company is a favorite among Wall Street investors and pays a substantial dividend. Through its subsidiary, Ellington Financial Operating Partnership, Ellington Financial acquires and manages mortgage-related, consumer-related, corporate-related, and other financial assets in the United States.
The company develops and manages residential mortgage-backed securities (RMBS) backed by:
- Prime jumbo
- Alt-A, manufactured housing, and subprime residential mortgage loans
- RMBS for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored entity
- Residential mortgage loans
- Commercial mortgage-backed securities
- Commercial mortgage loans and other commercial real estate debt
Ellington Financial also provides collateralized loan obligations, mortgage-related and non-mortgage-related derivatives, corporate debt and equity securities, corporate loans, and other strategic investments. In addition, the company offers consumer loans and asset-backed securities backed by consumer and commercial assets.
B. Riley has a Buy rating with a $16 target price.
Hercules Capital
This company is the lender of choice for many innovative entrepreneurs and their VC partners. Hercules Capital Inc. (NYSE: HTGC) is a specialty finance company that focuses on providing financing solutions to venture capital-backed and institutional-backed companies across various technology and life sciences industries. It is structured as an internally managed, non-diversified, closed-end investment company.
The company’s business objectives are to increase its net income, net investment income, and net asset value through investments in primarily structured debt or senior secured debt instruments of venture capital-backed and institutional-backed companies across various technology-related industries, at attractive yields.
It invests in a range of companies active in the technology industry sub-sectors characterized by products or services that require advanced technologies, including:
- Computer software and hardware
- Networking systems
- Semiconductors
- Telecommunications equipment and media
- Semiconductor capital equipment
- Information technology infrastructure
Wells Fargo has assigned an Overweight rating, accompanied by a $19 target price.
Starwood Property Trust
Run by real estate legend Barry Sternlicht, this is a high-quality real estate investment offering a reliable, ultra-high-yield dividend. Starwood Property Trust (NYSE: STWD | STWD Price Prediction) is a real estate investment trust.
The company’s segments include:
- Commercial and Residential Lending
- Infrastructure Lending
- Property
- Investing and Servicing
The Commercial and Residential Lending segment is engaged in:
- Originating, acquiring, financing, and managing commercial first mortgages
- Non-agency residential mortgages
- Subordinated mortgages
- Mezzanine loans
- Preferred equity
- Commercial mortgage-backed securities
- Residential mortgage-backed securities
- Real estate and real estate-related debt investments in the United States, Europe, and Australia
The Infrastructure Lending Segment is engaged in originating, acquiring, financing, and managing infrastructure debt investments.
The Property Segment is engaged in acquiring and managing equity interests in stabilized commercial real estate properties.
The Investing and Servicing segment includes a servicing business in the United States, an investment business, and a mortgage loan business.
JPMorgan has an Overweight rating for the stock with a $19.50 price objective.
Four Stealth Passive Income Stocks Under $10 Pay Ultra-High-Yield Dividends
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