If you're trying to put your money to work on Wall Street, there's an endless array of interesting strategies. Luckily, one of the most effective methods to generate outsize returns, buying dividend stocks to hold long term, is also one of the easiest to implement.
Businesses usually become profitable on a recurring basis long before they commit to a dividend program. Once they make such a commitment, returning a portion of profits to shareholders forces management teams to make smarter decisions.
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By taking fewer unnecessary risks, dividend-paying businesses tend to outperform non-dividend-payers by a wide margin. During the 50-year period between 1973 and 2022, dividend-paying stocks in the benchmark S&P 500 index delivered a 9.18% average annual return, while non-dividend-paying stocks in the same index returned just 3.95% on average, according to Hartford Funds and Ned Davis Research.
If you're sitting on $5,500 that you don't need to pay bills or cover unforeseen emergencies, spreading it around these three stocks could mean $500 of dividend income enters your brokerage account over the next 12 months. Plus, there could be much more in the years that follow.
AT&T
Income-seeking investors should be flocking to AT&T (T 1.02%) now that it's sold off all of its risky media assets.
AT&T finished September with $129 billion in net debt. This is a heavy load, but highly reliable cash flows from mobile, home, and business internet subscribers are sufficient to whittle it down to a more manageable figure.
AT&T generated $19.8 billion in free cash flow during the 12 months ended Sept. 30 and it's using these profits to reduce debt. The company is on pace to achieve a net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio in the 2.5 range during the first half of 2025.
At recent prices, AT&T shares offer a 6.6% yield. At this level, $1,510 is enough to secure $100 per year in dividend payments that could rise significantly in the years ahead.
PennantPark Floating Rate Capital
PenantPark Floating Rate Capital (PFLT 0.61%) is a business development company (BDC) that offers investors a huge 10.9% yield at recent prices. With such a high yield, you can set yourself up with $200 in annual dividend payments by adding around $1,850 worth of shares to your portfolio.
This is a great stock for income investors who are in a hurry. In addition to a huge up-front yield, it offers monthly dividend payouts.
America's BDCs exist to finance middle-market businesses that the country's biggest banks tend to ignore. PennantPark Floating Rate Capital's $1.1 billion portfolio is spread across 130 portfolio companies.
BDCs don't have to pay income taxes as long as they distribute at least 90% of profits to investors as a dividend. That makes growth a challenge, but PennantPark Floating Rate Capital was able to raise its dividend payout by 7.9% in 2023.
As its name implies, this BDC specializes in variable-rate debt that's a lot more expensive to service now that interest rates have risen sharply. Despite the challenges, just three of its portfolio companies representing less than 1% of the portfolio were on non-accrual status at the end of September.
Ares Capital
With a portfolio worth around $21.9 billion, Ares Capital (ARCC 0.73%) is America's largest BDC. It offers a 9.6% yield at recent prices, so an investment of $2,100 is more than enough to secure $200 in annualized dividend payments.
Ares Capital's dividend is up by 20% since early 2021. Investors can reasonably expect it to continue rising in the years to come. Loans on non-accrual status peaked in the first quarter of this year at 2.3% of the portfolio. This figure fell to a very manageable 1.2% during the third quarter.
Around 69% of the loans on Ares Capital's books collect interest at floating rates, which works out well for the BDC and its shareholders. The average yield it receives on debt has risen sharply from 8.7% in the fourth quarter of 2021 to 12.4% in the third quarter of this year.
Ares Capital made it through the global financial crisis and the COVID-19 pandemic relatively unscathed. In fact, its debt-to-equity ratio improved significantly over the past year. A deep economic downturn that wipes out its portfolio companies could cause trouble for investors. Given its track record so far, though, market-beating gains seem far more likely.
