There are loads of way to generate passive income. One of the best ways to supplement portfolio growth is to seek out dividend stocks.
But when it comes to dividend income, did you know some opportunities may be more reliable than others?
Let's break down five companies that are not only established dividend payers, but assess why holding each of these stocks over a long-term time horizon can lead to massive gains for your portfolio.
1. Hercules Capital
Hercules Capital (HTGC 0.35%) is a business development company (BDCs). BDCs are a reliable source of dividend income because these companies are required to pay out at least 90% of their taxable income to investors each year.
While there are many types of BDCs, Hercules primarily focuses on high yield loans to start-ups in the technology, life sciences, and renewable energy industries. Although this may be perceived as risky, the chart below illustrates how strong Hercules has performed over the long-term.
HTGC Total Return Level data by YCharts
Over the last 10 years, Hercules stock has a total return of 271%. Not only does this emphasize the importance of reinvesting dividends, but it also highlights that Hercules has been a lucrative investment over the long-run.
With a juicy dividend yield of 10.4%, now could be a great opportunity to scoop up shares in Hercules stock.
Image Source: Getty Images
2. Ares Capital
Another prominent BDC is Ares Capital (ARCC -0.23%). Unlike Hercules, Ares doesn't typically work with high-profile tech companies that have raised funds from venture capital firms.
Rather, many of the companies in Ares' portfolio are lower middle market businesses that go overlooked by investment banks or private equity investors. Moreover, while Hercules specializes in basic debt instruments such as term loans or revolves, Ares offers more sophisticated products -- including leveraged buyouts (LBO).
ARCC Price to Book Value data by YCharts
At a price-to-book (P/B) ratio of just 1.1, Ares stock is trading at a noticeable discount to other leading BDCs. Moreover, the company's total return has outperformed the S&P 500 over the last three and five year periods.
Now looks like a great time to buy some shares in Ares at a 9.3% yield and prepare to hold for the next several years.
3. Rithm Capital
Another great source of dividend income is real estate investment trusts (REITs).
Rithm Capital (RITM 1.98%) is a REIT that specializes in commercial real estate and single-family rentals. But what I like about Rithm over other REITs is that the company also has a financial services platform which offers a variety of lending products.
One drawback that investors may see with Rithm is the company's exposure to broader themes in real estate. Indeed, lingering inflation and high borrowing costs have impacted consumers, businesses, and even home owners or renters.
However, I see Rithm as more insulated to these macroeconomic variables compared to other REITs precisely because of the company's complementary alternative asset financing operation. I think this is a big differentiator for Rithm, and helps mitigate some of the risk that comes with being a landlord.
With the stock trading at less than $11 per share, now could be a tempting time to considering buying some shares at a 9.2% yield.
4. Energy Transfer
Outside of financial services, investors can find lucrative sources of dividend income from the energy sector. Energy Transfer (ET 0.10%) is a master limited partnership (MLP) operating in the natural gas industry.
MLPs have an interesting operating structure because these entities pass income and losses along to their investors. This can be an attractive feature for income investors.
Moreover, MLPs also tend to distribute excess profits to limited partners (LPs). These payments are known as distributions and are similar to dividends.
One risk that is worth pointing out is that the energy sector can experience more pronounced volatility than other sectors. For example, current geopolitical conditions in Europe and the Middle East have greatly impacted legislative policy surrounding the energy industry.
But while these risk factors can impact a business in the short or intermediate term, it's important for investors to zoom out and think about the bigger picture.
The chart below illustrates Energy Transfer's free cash flow over the last 10 years. While it's improved dramatically over the last decade, trends in more recent years undermine the volatility energy businesses can experience due to broader macroeconomic factors.
Nevertheless, even during a challenging economic climate, the company has made it a point to raise its distributions to historically high levels. I think this showcases management's decisions to prioritize shareholders, even in tough times.
ET Free Cash Flow (Quarterly) data by YCharts
5. Enterprise Products Partners
The last company on my list is midstream energy specialist Enterprise Products Partners (EPD 0.51%).
Earlier this year, Enterprise Products Partners announced that it was acquiring joint venture interests from Western Midstream Partners. Moreover, in early April the company also announced that it was breaking ground on a series of new natural gas plants in the Permian Basin.
On the surface, it's challenging to try and quantify what the financial impacts of these deals and projects. However, at a high level, I see these moves as positive indicators. The reason is that Enterprise Products Partners is doing what it can to source growth.
While the energy sector may remain a bit volatile in the short-term, I think the company is taking necessary steps to lay the foundation for long-term success. I wouldn't sleep on the long-run potential gains here. Given the company's 7.1% yield, now looks like an interesting time to consider buying some shares.
