Investors looking to secure a steadily growing passive income stream have all sorts of options, but few are easier to implement than buying dividend-paying stocks. That said, not every dividend payer is in a position to raise its payout faster than the pace of inflation.
These three stocks offer investors above-average dividend yields and a chance to receive much larger payments down the road. Read on to see why retirees can't get enough of them.
1. CVS Health: 3.5% yield
Between 2010 and 2020, the number of Americans over 65 years old rose by 38%, compared to a gain of just 2% for the under-65 population. Now, there are more than 65 million Americans enrolled in Medicare plans, many of which are managed by CVS Health's (CVS +3.26%) health benefits management business, Aetna.
NYSE: CVS
Key Data Points
At the end of March, CVS Health was managing 7% more Medicare Advantage (MA) plans than a year earlier. This year, management expects a 12% MA membership gain.
CVS Health will likely get to retain increasingly larger portions of the monthly premiums Aetna receives. This is because it will be able to provide an increasing percentage of its members' services directly. Recently, the company acquired Signify Health, a network of more than 10,000 clinicians that connects with millions of patients in their homes annually.
CVS Health shares offer an above-average 3.5% dividend yield right now, and it will most likely grow at a rapid pace. The company was able to meet its dividend obligation with less than one-fifth of the free cash flow its operations generated over the past 12 months.
2. Physicians Realty Trust: 6.4% yield
CVS Health's dividend has grown 21% in two years, but this might not be fast enough if you're already retired. Investors seeking a higher yield up front may want to consider Physicians Realty Trust (DOC +0.00%).
NYSE: DOC
Key Data Points
This is a real estate investment trust (REIT) that collects rent for lots of medical office buildings it owns. At the end of March, Physicians Realty Trust had 275 healthcare properties, 91% of which are on a hospital campus or affiliated with a health system.
Shares of Physicians Realty Trust offer an above-average yield now because it could be awhile before it can raise its dividend payout again. Soaring interest expenses caused its bottom line to contract slightly. First-quarter funds from operations (FFO), a proxy for earnings used to evaluate a REIT's performance, fell 11% year over year to $0.24 per share. This is enough to meet a dividend obligation set at $0.23 per share, but it doesn't leave any room for error.
Physicians Realty Trust builds annual rent escalators into its long-term leases. Now that the Federal Reserve has slowed its pace of interest rate raises, those escalators could return this REIT's bottom line and its dividend to growth.
3. Ares Capital: 10.5% yield
Ares Capital (ARCC +0.43%) is a business development company (BDC), which, like REITs, can avoid income taxes if it distributes at least 90% of profits to investors as a dividend. By lending to midsized businesses that the big banks tend to ignore, Ares has been able to raise its payout by about 37% since 2010.
NASDAQ: ARCC
Key Data Points
Ares can get middle-market businesses to borrow at rates above the market average. The good news is that higher interest rates are translating to higher profits right now. First-quarter net investment income soared 61% year over year.
Ares Capital stock offers a high yield because the market is worried that borrowers won't be able to keep up with their recently increased interest expenses. This BDC is renowned for selecting borrowers that can generate cash in good times and bad. So far, it looks like its borrowers are mostly doing just fine. On March 31, unpaid loans represented 1.3% of total investments, compared to 1.1% at the end of 2022.
While Ares Capital offers a huge dividend yield that looks reliable, extra-cautious investors might want to tread lightly with this stock until loan losses start trending in the opposite direction.
