If you're interested in generating stable dividend income today as well as in the future, you'll need to look for a very particular kind of investment. Most companies don't have the benefit of rock-solid cash flows every quarter, nor do most have the confidence in their long-term growth to continue to give shareholders a raise year after year.
But some dividend stocks do have what it takes to pay a decent yield now while also ratcheting up their payouts like clockwork. Here are two such stocks that might be good purchases for your passive income collection.
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1. AbbVie
With a total return of 519% over the last 10 years, AbbVie (ABBV -0.65%) is a dividend stock that also has a habit of handily beating the market. To accomplish that feat, it develops and sells some of the world's highest-grossing medicines, like the arthritis drug Humira, which brought in $21.2 billion in 2022, bringing the company's top line to an impressive sum of more than $58 billion.
But now that Humira is getting its market share eroded by generic copies since the expiry of its exclusivity protections in 2023, other medicines will be driving AbbVie's growth -- and that's something key for dividend investors to appreciate about the stock.
Most other major pharmaceutical companies have forward dividend yields that are lower than AbbVie's, and Humira's decline is likely the reason why. Its payout presently has a forward yield of 3.9%. In other words, the fact that sales of its leading drug are eroding is causing the market to require a higher return to compensate for the risk that its base of revenue doesn't recover. The opportunity for investors is that its sales are already on the path to recovery before the fallout from the loss of Humira is finished.
Thanks to diligent investment in research and development (R&D), AbbVie already has a pair of medicines, Skyrizi and Rinvoq, that can theoretically compete in all of the same markets as Humira. That's nothing to sneeze at, considering Humira is approved to treat rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn's disease, ulcerative colitis, hidradenitis suppurativa, and a basket of other conditions.
Nonetheless, these newer drugs are well on their way to topping Humira's haul by 2027, with the company's immunology portfolio raking in 14.4% more money on a reported basis in 2022 despite generics ravaging Humira's international market share.
AbbVie's ability to commercialize new medicines is continuing to pay off as much as ever, and there's little sign that its R&D tempo will be decreasing anytime soon. Therefore, investors who buy shares now will get upside exposure to its share price appreciation as well as its strong and consistent dividend growth, likely without taking on too much risk in the process.
2. Realty Income
Realty Income (O 0.97%) is quite different from AbbVie as it's a real estate investment trust (REIT). Its business is to buy commercial real estate and rent it out in sale-leaseback transactions, handing the proceeds back to shareholders along the way.
For 2022, its net income was $869.4 million, all derived from rent across its 12,237 properties in the U.S. and European Union, and its normalized funds from operations (FFO) rose by 19.8% compared to a year prior, reaching $4.06 per share.
Even with widespread fear about the state of the economy and also the real estate market, this company is powering onward with a far faster growth rate than such a long-term-oriented business has any right to do -- and that isn't a new trend.
Since its debut in 1994, Realty Income has hiked its dividend at a compound annual growth rate (CAGR) of 4.4% while helping its shareholders to realize a compound annual total return of 14.6%, smashing the market's return. Part of the reason for this success is that 92% of its base of rental income is derived from tenants that sell goods or compete in industries that are somewhat resilient against economic headwinds, and management likely plans to keep it that way.
Nonetheless, in the last 10 years, its total return hasn't quite kept up with the market's, rising by only 137% compared to the SPDR S&P 500 ETF Trust's growth of 218%. But real estate is an inherently long-term asset class, so don't count it out over the coming 20 years.
Finally, its forward yield is around 4.6%, and it has one critical advantage that many dividend stocks don't: monthly payouts. So if you're going to be relying on it for your expenses, you won't need to wait as long as you might with another option. And that's yet another reason why it's a stellar investment for passive income.
