Investors looking to pad their passive income streams have plenty of stocks with high dividend yields to choose from. Unfortunately, stocks don't offer high yields until most investors have concerns about their underlying businesses.
The companies in this list face challenges that have pressured their stock prices and resulted in yields that are far above average. In each case, though, their dividends look safe enough that scooping up some shares now looks like a smart move for income-seeking investors.
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AT&T
The average dividend-paying stock in the benchmark S&P 500 index offers a paltry 1.6% yield at the moment. With that average in mind, the 7.9% yield AT&T (T 1.02%) offers at recent prices is hard to ignore.
AT&T slashed its dividend after spinning off the last of its media assets in 2022, and the stock has been under pressure ever since. Investors are more than a little concerned with a debt load of about $143 billion.
With customers who rarely disconnect their mobile or fiber internet connections, AT&T's telecom business is a reliably profitable one that generated $18 billion in free cash flow over the past 12 months. AT&T's dividend payment chewed up just 44.6% of trailing free cash flow, which means there are heaps left over to further reduce the company's debt load.
For at least the next couple of years, AT&T will prioritize debt reduction over dividend raises. With a steadily growing telecom business, though, its payout could rise at a low single-digit percentage throughout your retirement years.
PennantPark Floating Rate Capital
PennantPark Floating Rate Capital (PFLT 0.61%) is a business development company. Income-seeking investors like BDCs because they can legally avoid paying income taxes as long as they distribute at least 90% of profits as a dividend.
PennantPark doles out dividend payments monthly, and at the moment it offers a huge 11.6% yield. Except for a temporary dip in 2019, the BDC maintained or raised its payout since it began trading publicly in 2011.
BDCs exist because big banks tend to ignore middle-market businesses when they come asking for capital. As a result, BDCs can command above-average interest rates that rise in step with the Federal Reserve's target rate.
As its name implies, PennantPark Floating Rate Capital insists its borrowers take on debt at variable interest rates, and those rates have soared. The average yield it receives on debt instruments rose to 12.4% at the end of June from just 7.7% a year earlier.
Rising interest rates can quickly turn a struggling business into one that can't pay its debts, but PennantPark's underwriters exercise a great deal of caution when selecting new borrowers. At the end of June, just three out of 130 portfolio companies were on non-accrual status. There were four on non-accrual status at the end of March, which suggests conditions are already improving.
PennantPark isn't raising its dividend at a breakneck pace, but it was able to increase it by 2.5% this May. Careful underwriting could allow the BDC to continue meeting its dividend obligation and bumping it higher in the years to come.
Bank of America
Bank of America (BAC -0.21%) offers the lowest dividend yield on this list, but it's still more than double the benchmark average with a juicy 3.3% yield.
Bank of America slashed its payout in response to the global financial crisis, but it's up 60% over the past five years. Soaring interest rates could make the next several years ones to remember.
These days, folks can get more than 4% on any one of dozens of FDIC-insured savings accounts at smaller banks. Bank of America currently offers savers between 0.01% and 0.04%, but few have moved their deposits to greener pastures. Its average deposit balance of $1.9 trillion in the second quarter was down just 7% year over year.
Eventually, Bank of America's deposits will get more expensive, but for now, the company's raking in profits. Net interest income soared 14% year over year to $14.2 billion. Despite offering the lowest yield on this list, heaps more net interest income gives it a good chance to provide the most passive income over the coming decade.
