Imagine putting money in a magic box. This box regularly kicks out cash for you to use. And over time, the amount of money inside the box grows.
Such a magic box doesn’t exist. But some investing alternatives might seem to come close to fitting the bill. If you want $10,000 in passive income in 2023, it’s possible to do so by investing a total of $110,000 in these high-yield dividend stocks.
1. Ares Capital
Ares Capital (ARCC 1.28%) ranks as the largest publicly traded business development company (BDC). As a BDC, Ares provides financing to small to medium-sized businesses. The company must return at least 90% of its taxable income to shareholders in the form of dividends.
There’s been plenty of taxable income to return through the years. Ares has paid an attractive dividend for over 17 years. Its dividend yield currently stands at nearly 10.2%. An investment of $36,667 (roughly one-third of $110,000) would make you close to $3,725 in income this year.
But why is Ares Capital’s dividend so high? Like most BDCs, it uses leverage to boost its profits. Also, Ares makes more money when interest rates are higher. These two factors could bite the company, though, if rising interest rates cause the economy to tank and result in surging loan defaults.
However, Ares’ portfolio is more diversified than the average BDC, lowering its exposure to one business or industry. Its leverage profile is relatively conservative, especially with cyclical industries. The company’s annual loan loss rate is much better than the BDC industry average as well.
Thanks in large part to its strong dividend, Ares Capital’s total return since its IPO in 2004 has trounced the S&P 500‘s performance. There’s no guarantee that this track record will continue, but Ares’ expertise and scale should enable it to keep winning in the future.
2. Devon Energy
If you invested the same amount of $36,667 in Devon Energy (DVN 1.05%), you’d probably make an additional $3,161 in passive income this year. I use the word “probably” because Devon’s dividend can fluctuate based on its free cash flow.
However, I don’t think you have to worry about a steep decline in Devon’s dividend this year. The company is an oil producer, so oil prices affect its finances. The good news for Devon is that the U.S. Energy Information Administration currently predicts that oil prices won’t fall very much in 2023. And some industry experts predict that oil prices will rise this year.
Aside from its stellar dividend, Devon has been a big winner for investors over the last year. Its performance would have been even better, but oil prices fell in the latter part of 2022.
Devon’s long-term prospects appear to be pretty good as well. Even with the transition from fossil fuels to renewable energy sources, the demand for oil and gas should continue to increase for years to come.
3. Medical Properties Trust
A third tranche of $36,667 invested in Medical Properties Trust (MPW 2.85%) would make you nearly $3,131 in 2023. That brings the total passive income from these three stocks to over $10,000.
Medical Properties Trust is a real estate investment trust (REIT) that owns hospitals in 10 countries. Because of the tax laws for REITs, the company must return 90% or more of its profits to shareholders — similar to what BDCs such as Ares Capital must do.
2022 was a horrible year for Medical Properties Trust’s shareholders. The stock plunged over concerns about rising interest rates and financial challenges for some of the company’s tenants.
However, the climate is improving. The Federal Reserve isn’t expected to raise interest rates too much further. Hospital operators are now receiving higher reimbursement from Medicare and some private payers, which helps bolster their finances. Some Wall Street analysts are recognizing the better outlook with positive price target revisions for the stock.
Important words of wisdom
Investing $110,000 across these three stocks can realistically generate at least $10,000 in passive income in 2023. However, this won’t be a smart move for many investors.
It’s important that any investment portfolio be appropriately diversified. Buying only three stocks won’t provide an adequate level of diversification. Even though I’m optimistic about the prospects for Ares Capital, Devon Energy, and Medical Properties Trust, there’s always a possibility that any or all of these companies could run into issues that cause their stocks (and perhaps their dividends) to fall.
What if you want passive income, have $110,000 to invest, and it wouldn’t negatively affect the diversification of your overall portfolio? Check out Ares, Devon, and Medical Properties Trust. Just remember that — as stated earlier — there is no magic box.