There's no wrong way to make money on Wall Street, but some methods are more reliable than others. If it's a stream of passive income you're after, then dividend-paying stocks are hard to beat.
During the 50-year stretch between 1973 and 2022, the average dividend-paying stock in the S&P 500 index returned 9.18% annually. The average non-dividend payer in that benchmark index rose at an annualized rate of just 3.95% over the same time frame, according to research from Hartford Funds and Ned Davis.
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A 9.18% average annual return is nothing to complain about. That said, we can probably do even better by purchasing above-average dividend stocks like these three.
Ares Capital
Ares Capital (ARCC 0.73%) is a business development company (BDC) that sports a huge 9.9% dividend yield at recent share prices. An investment of around $4,967 would be enough to secure $500 in annual dividend income from this stock.
BDCs are essentially banks that lend to middle-market businesses -- companies with between $10 million and $1 billion in annual revenue. BDCs are popular portfolio holdings among income-seeking investors because those companies legally avoid paying income taxes by distributing at least 90% of their profits annually to shareholders as dividends (much like real estate investment trusts do).
Still, when you see a double-digit percentage yield, it usually means the market is concerned about the company's ability to sustain its payout. The stock market is nervous about Ares Capital because more than two-thirds of its outstanding loans collect interest at floating rates that have risen sharply over the past couple of years.
Ares Capital generally limits its investments to companies with private equity sponsors and the profits they need to keep up with loan payments. So far, its careful underwriting appears to be working as intended. At the end of June, loans on non-accrual status represented just 2.1% of total investments compared to 1.7% six months earlier.
Realty Income
Realty Income (O -0.17%) is an iconic real estate investment trust (REIT) that distributes dividends to investors monthly. Like BDCs, REITs are tax-advantaged businesses that must distribute nearly all of their profits to shareholders.
Realty Income offers an unusually large 6.1% dividend yield at recent share prices. With an investment of $4,958, you can secure $300 in annual dividend income from this stock.
Realty Income buys and develops retail and industrial properties that it rents out under long-term leases. The company uses a net lease structure that transfers all the variable costs of building ownership -- such as taxes and maintenance -- to the tenant.
Its net lease strategy, plus a property portfolio spread throughout the U.S. and abroad, and occupied by a diverse variety of businesses, makes this REIT's cash flows highly predictable. Since it went public in 1994, it has raised its payouts 122 times.
Rising interest expenses could hinder Realty Income's pace of dividend growth, but that is a temporary challenge of the sort that it has overcome in the past and will likely overcome again. Taking advantage of its beaten-down share price looks like a smart move right now.
American Tower
American Tower (AMT -0.70%) is a specialized REIT that owns multitenant telecommunications towers all over the world, plus dozens of data centers across the U.S. At its current share price, it offers the smallest yield on this list -- but it's also the fastest dividend grower.
Unlike the buildings in Realty Income's portfolio, many of American Tower's real estate assets support multiple tenants. This unique feature has helped it raise its dividend faster than almost any REIT around. It has boosted its quarterly payout by 93% over the past five years and 459% over the past decade.
This REIT's tenants need to constantly upgrade their technology, but the towers that they mount that new equipment on rarely need updating. Rising interest expenses will most likely limit American Tower's earnings growth, but that will be a temporary problem for it.
American Tower offers a 3.9% dividend yield at recent prices, which is much higher than usual for this stock. An investment of $5,176 is all it would take to secure around $200 in annual dividend income. If the payout rises at its usual pace in the years ahead, though, American Tower could be providing your biggest passive income stream once you're ready to retire.
