2 Top Dividend Stocks to Buy in November

What would rather own as a dividend investor, a stock with a 5.5% yield or one with a 9.4% yield? All else being equal, you'd probably go for the higher yield. Who wouldn't? But no two companies are ever equal and when you see two yields like that, you know right away that there's something very different.

Here's why dividend investors will want to look at companies like high-yielders Realty Income (NYSE: O) and Federal Realty (NYSE: FRT) in November, using ultra-high yield Ares Capital (NASDAQ: ARCC) as an important reference point.

They are all good companies

The first and most important thing to highlight here is that Realty Income, Federal Realty, and Ares Capital are all well-run businesses. They are all fairly well-respected, too, with each acting as something of a bellwether for the niches in which they operate. Realty Income is the largest net lease real estate investment trust (REIT). Federal Realty is a leader in the strip mall sector. Ares Capital is a bigwig in the business development company. Because of their legal structure, all three are required to pass on almost all their income to investors through dividends.

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That said, they have dramatically different yields to offer. Federal Realty's yield is the lowest at 4.7%. Realty Income is next in line at 5.6%. And Ares Capital tops the list with a huge 9.4% yield. But don't stop at the yield if you need reliable income to help pay your bills.

Dig into the business, not just the yield

Notably, Federal Realty is the only REIT to have achieved Dividend King status, with more than five decades' worth of dividend hikes under its belt. It has very clearly proven that it places a high value on returning cash to investors via an increasing dividend. And the business is run in a very attractive way, as well.

Unlike many of Federal Realty's peers, it focuses on quality over quantity. The REIT owns large and incredibly well-positioned properties. On top of that, it has long focused on redevelopment and development, essentially making its assets more valuable through capital investment. Management is also willing to sell assets once they've reached full value, using the cash freed up to invest in new assets where there's an opportunity to build value. The model works and the incredible dividend history is proof of that.

Realty Income has increased its dividend annually for 30 consecutive years. Unlike Federal Realty, Realty Income has focused on using scale to its advantage and has now grown to become the largest net lease REIT with more than 16,500 properties in its portfolio (the tenant pays most property operating costs in net lease agreements). It has properties across the U.S. and Europe. It is focused on retail assets, but also has industrial properties and some more unique property types, like vineyards and casinos. And it has also been expanding in new directions, including offering loans and creating an asset management business for institutional investors.

Simply put, Realty Income has a solid core and a lot of levers to pull as it looks to keep growing. The scale it has gives it easier access to capital, the ability to close deals smaller peers couldn't handle, and it can spread its bets more widely to reduce risk.

To be fair, this is a foundational income investment that is about as exciting as watching grass grow. But that's the point. From the ground up (it has an investment grade-rated balance sheet), Realty Income is built to pay reliable dividends. Add in a lofty 5.5% yield and even the most conservative dividend investors should appreciate this REIT.

Then comes Ares Capital, which is also designed to pass income on to shareholders. But reliable isn't a word that can be attached to the company's dividend history. That's not exactly Ares Capital's fault, though, because its business model is by definition risky. It makes high-interest rate loans to smaller companies that have difficulty borrowing from banks.

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When times are good, Ares Capital's investments will generate reliable revenue to support the dividend. But when there's a recession and the companies it invests in are struggling, the dividend can get cut.

The logic here isn't hard to understand if you think about the business model. Supporting a high-interest loan is just harder during periods of business weakness. That's not good or bad, it is simply how the BDC model works. If you need reliable dividends to pay your bills, Ares Capital isn't going to be a good fit for your portfolio.

Boring is better if you need the dividends

Federal Realty and Realty Income both pride themselves on being boring dividend stocks. That's great news if you are looking to dividends to help pay your bills in retirement. Ares Capital is an exciting business and has a huge yield. But the excitement sometimes comes along with dividend volatility. Unless you can handle a dividend cut, you probably won't want to add a company like Ares Capital to your portfolio.

Reuben Gregg Brewer has positions in Federal Realty Investment Trust and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.