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- Main Street Capital (MAIN): It demonstrates robust financial performance with an exceptional ROE and NAV per share.
- Enterprise Products Partners (EPD): It manages operational challenges effectively, achieving record midstream volumes while sustaining distribution growth.
- Arbor Realty Trust (ABR): It maintains a healthy dividend payout ratio, reflecting reinvestment potential while originating new loans.
- A balanced investment across stocks with yields ranging from 6.84% to 12.20% showcases a diversified income stream opportunity.
A formidable trio is worth looking for for investors looking for stable passive income. The first on the list has exceptional return on equity (ROE) and dividend growth, coupled with the second one’s resilience amid challenges and consistent distribution hikes, forming a resilient backbone. The third one’s strategic payout ratio and book value appreciation add allure.
A portfolio equally distributing investments across the three stocks could generate $10,000 in passive income annually with ~$112.5K invested. Assuming equal weights, there is ~$37.5K in each stock. The first one, at a 6.84% yield, would generate $2,565. Similarly, the second one, at a 7.64% yield, would produce $2,865. Finally, the third stock, at a 12.20% yield, would yield $4,575 in yearly income. The cumulative dividends from these stocks, considering equal weight and respective yields, sum up to ~$10K, meeting the passive income goal.
Read more to explore their financial prowess, growth strategies, and dividend stability, and delve deeper into each company’s metrics. These metrics highlight how this trinity strategically harmonizes to generate a reliable return.
Main Street Capital (MAIN)
Main Street Capital (NYSE:MAIN) demonstrates exceptional ROE figures. For instance, in Q3 2023, ROE stands at 17.9% and 18.2% for the trailing 12-month period. This strong performance at this metric suggests the efficient use of shareholder funds to generate income.
Additionally, the net asset value (NAV) per share increased by 2.3% sequentially and 9.2% year-over-year. The impact of fair value increases in the investment portfolio, the accretive effects of equity issuances, and the retention of excess net investment income (NII) per share above total dividends paid collectively contributed to the growth in NAV. The growth highlights the company’s progressive investment strategies and value appreciation in its portfolio. Main Street boasts a highly diversified investment portfolio, spanning 195 companies across more than 50 industries, including lower middle market, private loan, and middle market portfolios.
Main Street’s dividend coverage ratio is a key metric reflecting its ability to cover dividend payments from its earnings. The distributable net investment income (DNII) surpassed the monthly dividends paid to shareholders by 51% and the total dividends paid by 8% in Q3. Thus, this robust dividend coverage ratio suggests that the company’s earnings adequately cover its dividend obligations. Fundamentally, it provides reassurance about the sustainability of dividends.
Main Street has exhibited consistent dividend growth over time. It declared a ninth consecutive quarterly supplemental dividend, representing a significant 35% increase beyond regular dividends. Lastly, the company announced a 6.7% increase in regular monthly dividends for Q1 2024 compared to Q1 2023. Therefore, these consistent dividend increases signify Main Street’s focus on returning value to its shareholders.
Enterprise Products Partners (EPD)
Enterprise Products Partners (NYSE:EPD) faced several operational challenges. They include record heat-affected processing plant throughput, operational issues at PDH plants, and low natural gas and NGL prices. Despite these adversities, Enterprise Products Partners achieved noteworthy operational milestones and handled record volumes across its midstream system.
Fundamentally, Enterprise Products Partners has a diverse portfolio across midstream segments and plays a crucial role in mitigating the impact of challenges. The portfolio includes liquid pipelines, natural gas pipelines, NGL fractionators, and marine terminals. The company can transport 12.2 million barrels of crude oil equivalent daily and export various hydrocarbons. This highlights the company’s operational strength and adaptability to market fluctuations.
Additionally, Enterprise Products Partners has made substantial capital investments to build a solid growth momentum, focusing on growth projects totaling $2.3 billion in the first three quarters of 2023. It forecasts significant growth in capital expenditures for 2023 ($3 billion) and maintains a balanced approach to capital allocation. Interestingly, the company manages its debt prudently, with a weighted average cost of debt of 4.6% and a high percentage of fixed-rate debt.
Strategically, Enterprise Products Partners demonstrated a proactive approach toward expansion and growth. The company plans to build two additional 300 million cubic feet-per-day processing plants in the Permian Basin, further expanding its infrastructure. Further, they unveiled plans for converting the Seminole crude oil pipeline back to NGL service and announced the Bahia 30-inch NGL pipeline, enhancing NGL takeaway capacity.
Lastly, Enterprise Products Partners demonstrated consistent distribution growth (25 consecutive years). For instance, it has announced a 5.3% increase in distributions for Q3 2023 compared to Q3 2022. Therefore, the company showcased a disciplined approach to buyback programs, reducing the common unit count without significant asset sales.
Arbor Realty Trust (ABR)
Arbor Realty Trust (NYSE:ABR) maintains a progressive dividend payout ratio. As of Q3 2023, the ratio is approximately 78%, indicating that a substantial portion of its earnings remain available for reinvestment, with the remaining being critical for financial stability and a growth strategy.
At a broader level, maintaining a lower payout ratio in an industry context indicates the company’s confidence in its ability to generate consistent earnings while sustaining shareholder dividends. This fundamental suggests that Arbor Realty Trust’s business model is designed to generate earnings that surpass dividend payments. As a result, this is providing a shield for potential market fluctuations.
In detail, in Q3 2023, Arbor Realty Trust reported distributable earnings of $0.55 per share and an 18% ROE. Such a high ROE suggests that Arbor Realty Trust generated a significant return on the equity invested by its shareholders, indicating operational efficiency and effective utilization of available capital.
Arbor Realty Trust’s effective management of its balance sheet, as demonstrated by recouping approximately $100 million of capital and originating $1.1 billion of loans in the GSE/Agency Business. Recouping invested capital while originating new loans signifies a dynamic approach to managing its loan portfolio.
Additionally, Arbor Realty Trust’s significant book value appreciation, experiencing approximately 40% growth over three years from around $9 to nearly $13 per share, indicates its solid underlying asset performance. This substantial appreciation implies that Arbor Realty Trust’s assets have increased in value over time. This is due to factors such as improved market conditions, effective management of risks, or progressive investments.
Overall, a rising book value per share boosts shareholders’ increased ownership value. Therefore, this suggests the company can create shareholder value and attract further investment interest.
On the date of publication, Yiannis Zourmpanos did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Yiannis Zourmpanos is the founder of Yiazou Capital Research, a stock-market research platform designed to elevate the due diligence process through in-depth business analysis.
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