Your 3% Dividend Yield Could be 9%: Here’s What You’re Missing

Many dividend-focused investors are getting modest yields when they could be considering higher-income investments. While the S&P 500 Index‘s average dividend yield languishes below 2%—”much lower than historical dividend yields,” Sahil Vakil, a financial advisor and founder of MYRA, told Investopedia—savvy income investors are often obtaining higher payouts elsewhere.

“The most common misconception about dividend yields is that a high yield is always a good thing and a sign of a strong investment,” Vakil said. “Investors often focus solely on the dividend yield percentage without considering the underlying reasons for it, such as a declining stock price or a company’s ability to sustain dividend payouts.”

The task, then, is to find higher-yield investments without investing your money in something that is unsustainable or carries excessive risk. We examine two higher-yielding options below.

Why Traditional Dividend Yields May Not Be Enough

While dividend investing remains a cornerstone strategy for many, the reality is stark: the S&P 500’s average dividend yield hovers below 2%. The decline is part of a fundamental shift in what companies do with their money, often favoring stock buybacks over dividends—in short, using the funds to increase their stock price over stockholder distributions.

For retirees or those approaching retirement, this yield gap presents a particular challenge, especially as yields can shift with broader economic changes. “Dividend growth investment strategy is impacted by many direct and indirect factors,” Vakil said. “Direct factors include interest rate movements by the Federal Reserve. For example, if the Federal Reserve eases monetary policy by decreasing interest rates, then high dividend stocks become more attractive as interest rates fall.” Indirect factors would be broad economic or sector-specific changes that affect earnings and thus dividend payouts.

For several decades, financial planners have suggested a 4% to 4.7% withdrawal rate from portfolios—a target that’s difficult to achieve through traditional dividend stocks alone without dipping into your principal.

Business Development Companies (8% to 15%)

Created by Congress to encourage investment in middle-market businesses, BDCs are publicly traded entities sometimes called “private equity for the common investor,” providing financing to companies too large for bank loans but not yet ready for public markets.

BDCs must distribute at least 90% of their taxable income as dividends, resulting in yields often ranging from 8% to 15%. Ares Capital (ARCC), the largest BDC with a $15 billion market cap, has a 9.5% yield (here and below, the last distribution as of April 2025) with a comparatively conservative portfolio primarily in senior secured loans. For higher potential returns, TriplePoint Venture Growth (TPVG) has a dividend yield above 20%, gained by financing growth-stage technology companies—thus, less likely to be stable.

However, these impressive yields come with significant risks. BDCs can borrow up to $2 for every $1 they own, which can amplify losses when things go wrong. They lend to smaller businesses that are more likely to default during tough times, so dividends are likely to drop when the economy slows.

Midstream Energy Infrastructure (4% to 8% Yields)

Midstream energy companies own and operate the pipelines, storage tanks, and processing facilities that move oil and natural gas from wells to refineries and then on to consumers. They’re like the toll roads of the energy industry, collecting their fees regardless of energy prices.

These companies are formed as master limited partnerships (MLPs), allowing them to gain the tax benefits of being a limited partnership while offering units (not shares) to the public. They yield between 4% and 8%. For example, Energy Transfer LP (ET) has a yield of 7.8%, while Enterprise Products Partners LP (EPD) has a yield of 7.1%.

To instantly diversify your money across different companies in the sector, consider exchange-traded funds (ETFs). For example, the Alerian MLP ETF (AMLP) is a $10 billion fund that tracks the Alerian MLP Infrastructure Index and has a dividend yield of 7.8%. The Global X MLP ETF (MLPA) has a yield of 7.3% while tracking the Solactive MLP Infrastructure Index.

What makes midstream companies attractive is their steady cash flow from long-term contracts with built-in inflation adjustments. However, economic downturns can reduce energy demand, some companies carry significant debt, and many MLPs issue complex tax forms that can make tax preparation more challenging. You can solve this last problem by just holding these MLPs through an ETF.

The Bottom Line

While traditional dividend stocks offer modest yields, there’s a world of higher-income prospects for investors willing to explore less familiar territory. BDCs and midstream energy infrastructure MLPs are just two options for investments that have often paid out higher dividends. However, they have specific risks and tax implications that must be carefully weighed against your financial goals and risk tolerance.