Income investing can be a strategy that gets investors through times of market volatility. While a stock's share price can swing from one extreme to another, the payout is often more stable by comparison. That can help investors maintain an ownership mindset rather than a trading mindset.
Ares Capital(NASDAQ: ARCC) and Digital Realty Trust(NYSE: DLR) are two businesses that appear to pay reasonably safe dividends. Investing $3,350 in each of these two stocks could generate $500 in starting annual passive income for investors.
1. Ares Capital: A blue-chip business development company
What is a business to do if it can't secure financing through traditional means to expand its operations? This is a valid question, because there has been an approximately 50% decline in banks' share of middle market lending over the last 29 years. Increasingly, the needs of such companies are being fulfilled by business development companies (BDCs) such as Ares Capital.
As the largest BDC in the United States, the company makes ownership and equity investments in bigger middle-market businesses and lends capital to them (typically for for higher interest rates). Spread across 466 businesses in almost three dozen industries, the BDC has a $21.1 billion investment portfolio as of March 31. And Ares Capital's slant toward quality middle-market companies has always been present. In the last 10 years alone, this has become even more clear: The company's weighted average earnings before interest, taxes, depreciation, and amortization (EBITDA) of its holdings has soared from $53 million in 2013 to $294 million as of March 31, 2023.
Ares Capital's business model has resulted in more than 13 years of steady-to-rising dividends for its shareholders. Along with its low dividend payout ratio (for a BDC), this makes its 10.4% dividend yield safer than you'd expect compared to the 1.6% yield of the S&P 500 index. At the current share price of $18 and change, $3,350 would purchase 184 shares of Ares Capital. Using the current annualized dividend per share of $1.92, this would generate $353 in annual dividend income (not including special dividends). And with a price-to-book (P/B) ratio of 1, shares of the stock are trading in line with their 10-year median P/B ratio.
2. Digital Realty: A titan of the data center real estate industry
Within the data center real estate space, Digital Realty's $30 billion market capitalization is second only to Equinix's (NASDAQ: EQIX) $72 billion market cap. As of March 31, the former owned 314 data centers in more than 50 metro areas around the world.
As numerous secular trends persist like video streaming, e-commerce, and the Internet of Things, data consumption and the need for additional data centers will arise. This is why, in spite of what look to be temporary issues with elevated debt, foreign currency headwinds, and high interest rates, Digital Realty should continue to thrive over the long run.
Coupled with a dividend payout ratio that will come in the low-70% range in 2023, I believe the REIT can build on its 17-year dividend growth streak in the years to come. This is what makes Digital Realty's 4.7% dividend yield appealing to income investors. And at the current $105 share price, investors with $3,350 available for investment could pick up 31 shares of the stock, producing $151 in beginning annual dividend income. With shares of the stock sporting a trailing-12-month (TTM) dividend yield of 4.5%, Digital Realty Trust currently offers more starting income than its 10-year median TTM dividend yield of 3.6%.
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