If you’re worried about retiring without being sufficiently passive, you have more than a few options. Buying rental properties is a popular venture, but these properties could lose money if you hire a property manager who doesn’t maintain them or employ paying tenants.
Investors looking to build a truly passive income stream are probably better off buying dividend stocks. By choosing companies that can continue to grow their bottom line, you could end up with a passive income stream that continues to grow without any additional effort on your part.
Pfizer (NYSE:PFE), Ares Capital (NASDAQ:ARCC)And AT&T (NYSE:T) appear poised to deliver steady earnings growth for at least another decade. Additionally, they offer an average dividend yield of 7.6% at current prices. That’s more than five times the average return you’d get from dividend payers in the benchmark S&P 500 Index.
The average yield on these stocks is high enough that a $13,200 investment between them is more than enough to secure $1,000 in annual dividend income.
Pfizer
Shares of Pfizer have fallen about 37% over the past 12 months, largely because sales of COVID-19 products fell faster than investors expected. Fortunately for income investors, Pfizer’s reported $44.2 billion drop in annual sales of COVID-19 products last year hasn’t wiped out the company’s 15-year streak of consecutive annual dividend increases.
At current prices, Pfizer offers a yield of 6.5%. Thanks to the smart investments the pharmaceutical giant has made in its COVID-19 products, there’s a good chance it can grow its payout for another 15 years.
More than a dozen Pfizer drugs grew sales by 10% or more last year, adjusted for a stronger dollar. Excluding declining sales of its COVID-19 products, the company reported a 7% increase in overall sales last year.
Continued high single-digit annual growth appears likely for Pfizer. The company received a record nine new drug approvals from the Food and Drug Administration last year.
Ares Capital
Ares Capital is America’s largest publicly traded business development company (BDC). Ares and its BDC peers are popular with income-seeking investors because they don’t have to pay income taxes as long as they return at least 90% of their profits to investors as dividend payments.
At current prices, Ares Capital offers a dividend yield of 9.5%. The quarterly distribution has not increased linearly, but has increased by 20% over the last three years.
As a BDC, Ares Capital is essentially a lender to middle-market companies that typically have annual revenue between $10 million and $1 billion. Banks tend to ignore medium-sized companies and are therefore willing to pay exorbitant interest rates. At the end of 2023, Ares Capital’s debt portfolio returned an average of 12.5%.
Approximately 60% of Ares Capital’s portfolio consists of senior and second-lien secured loans, which are the first to be repaid in the event of bankruptcy.
Thanks to an underwriting department worthy of a gold star, Ares Capital shareholders are likely to see many years of slow but steady payout increases. At the end of 2023, 69% of Ares Capital’s portfolio paid interest at variable interest rates. Despite interest rates rising sharply in recent years, only 1.3% of BDC’s portfolio was in Non-Accrual status at the end of 2023.
AT&T
AT&T may not come up when most investors look for high-dividend stocks, as the company cut its payout by 47% in 2022 after selling off risky and unpredictable media stocks. At current prices, it offers a 6.8% yield and there’s a good chance it can increase that payout again soon.
Fixed-line telephony and internet revenues are declining, but the company’s investments in 5G infrastructure could prove beneficial for long-term shareholders. The company increased mobile service revenue by 4.4% last year. Fiber optic sales rose 27% last year, and total broadband internet sales could continue to rise in 2024. Late last year, AT&T launched a new fixed wireless service for customers in areas where fiber is not yet available.
AT&T generated $16.8 billion in free cash flow last year, and profits are rising. In 2024, management expects free cash flow to be in the range of $17 billion to $18 billion. That’s more than the company needs to pay off its debts and increase its payout again.
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Cory Renauer holds positions at Ares Capital. The Motley Fool has positions in Pfizer and recommends it. The Motley Fool has a disclosure policy.
Do you want an annual dividend income of $1,000? Invest $13,200 in these ultra-high-yield dividend stocks. was originally published by The Motley Fool