If you're looking for a surefire way to secure a big stream of passive income, there are plenty of options. For those of us who prefer a hands-off approach, though, it's hard to beat dividend-paying stocks.
Historically, companies that commit to paying investors a portion of their profits outperform those that don't -- and the margin isn't even close. During the period from 1973 through 2022, stocks in the S&P 500 index that initiated or grew their dividends delivered a 10.2% average annual return. Over the same time frame, non-dividend payers in the same index actually fell by an average of 0.6%, according to data from Hartford Funds and Ned Davis Research.
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Generally, shares of successful companies with growing businesses offer relatively low yields. Conversely, stocks usually don't offer a high yield unless investors are worried about the underlying businesses' ability to maintain and raise their payouts.
Finding high-yielding stocks with reliable dividends can be a challenge, but they are out there. For example, investing about $2,390 split between these two stocks at recent prices will generate $200 in annual dividend income over the next 12 months, and more in the years ahead.
Ares Capital Corporation
The U.S.'s mid-sized businesses are unintended victims of regulations intended to keep its largest banks from requiring bailouts at taxpayers' expense. Starved for capital, middle-market businesses are willing to borrow at relatively high rates from business development companies (BDCs) such as Ares Capital (ARCC 0.73%).
As a BDC, Ares Capital doesn't have to pay income taxes as long as it distributes nearly everything it earns to shareholders as a dividend. At recent prices, its dividend offers a big 9.8% yield. At this level, an upfront investment of just $1,040 is enough to produce $100 in annual dividend payments.
The dividend income Ares Capital delivers is relatively reliable. Its quarterly payout hasn't risen in a straight line, but it is up by 23% over the past five years.
With a portfolio of 475 companies, Ares Capital is the largest BDC in the U.S. But it didn't get that way by lending to every business that comes calling. This BDC only lends to companies that have private equity sponsors it's partnered with, plus an ability to generate cash in good economic times and bad.
More than two-thirds of Ares Capital's investments collect interest at floating rates that shot up recently. During the 12 months ended June 30, the average yield on total investments rose from 8.7% to 11%.
Despite higher interest payments, loans on non-accrual status represented just 2.1% of Ares Capital's portfolio at the end of June. With just a handful of its portfolio companies buckling under the weight of higher interest payments, this stock is a relatively reliable way to bump up your passive income stream.
AT&T
AT&T (T 1.02%) offers investors a big 7.5% dividend yield because the market is a little worried about its ability to cope with the $143.3 billion in debt that was on its balance sheet at the end of June. Potential financial liability related to the company's past use of lead-sheathed cables is pushing it down too.
I'm not a legal expert, but pinning blame on AT&T for using cables that were acceptable when they were buried, decades ago, seems like an uphill battle.
As for the company's debt load, cash flows from millions of mobile and broadband internet subscribers are strong enough to significantly reduce interest expenses while pumping up its dividend payout. Second-quarter revenue from AT&T Fiber jumped 28% year over year, and the company is on pace to add over 1 million new fiber-internet subscribers this year.
AT&T generated a whopping $18.2 billion in free cash flow over the past 12 months. That was more than double what it needed to meet its dividend commitment.
At recent prices, just $1,350 is all it takes to secure $100 in annual dividend income from AT&T. Since it has plenty of free cash flow to make quarterly payments and shrink its debt load, buying this stock now to hold for the long run looks like the right move.
