Stock market trends come and go, but there's one currently popular strategy for everyday investors who want to secure a stream of passive income that never goes out of style. Buying dividend-paying stocks and holding them for long periods is still an easy and effective way to realize market-beating gains.
Investing in companies that have profits to distribute is a proven strategy. During the 50 years from 1973 through 2022, dividend-paying stocks in the S&P 500 delivered an average annual return of 9.18% compared to just 3.95% for companies in the same benchmark index that didn't offer a dividend.
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These three dividend payers offer a rare combination of high yields upfront combined with a strong chance to see their payouts rise in the years ahead. Here's how adding them to your portfolio in 2024 could lead to steady payments that keep rising throughout your retirement years.
Ares Capital
Ever since the Great Recession, America's largest banks mostly stopped lending to middle-market companies regardless of their ability to generate cash and make interest payments. As a result, heaps of capital-starved companies with between $10 million and $1 billion in annual revenue are eager to accept relatively high-interest loans from business development companies (BDCs) like Ares Capital (ARCC +0.44%).
NASDAQ: ARCC
Key Data Points
In the third quarter, 69% of Ares Capital's portfolio was earning interest at floating rates that grew significantly. The average yield on total investments at cost rose to 11.2% in Q3 from 9.6% a year earlier.
Ares Capital stock offers a huge 9.7% dividend yield at recent prices. It hasn't risen in a straight line, but the payout is up 14% over the past five years.
After 19 years of operation, Ares Capital has worked with thousands of businesses and hundreds of private equity sponsors. There are so many middle-market companies trying to borrow money that well-established BDCs like Ares Capital can pick and choose non-cyclical businesses likely to repay their debts regardless of the overall economy.
ARCC Dividend data by YCharts.
Around 23% of Ares Capital's diverse portfolio is invested in the software and services industry; its next largest concentration is in healthcare services at just 11% of the portfolio. Such diversification has helped the BDC report industry-leading loss rates since its inception in 2004 and will likely allow it to keep meeting its dividend commitments for many years to come.
PennantPark Floating Rate Capital
PennantPark Floating Rate Capital (PFLT +0.60%) is another BDC that offers an eye-popping dividend yield. At recent prices, it offers a 10.3% yield, and it distributes payments every month.
NYSE: PFLT
Key Data Points
A monthly payout isn't the only thing that sets PennantPark Floating Rate Capital apart from Ares Capital. As its name implies, nearly all the loans in PennantPark's portfolio collect interest at floating rates. The average yield it received on debt investments during its fiscal Q4 that ended Sep. 30 surged to 12.6% from 10% in the previous-year period.
PennantPark's track record isn't as long as Ares Capital's, but it looks pretty good so far. Its dividend payout dipped briefly in 2018, but it's up 13.9% since the company initiated a dividend program in 2014.
PFLT Dividend data by YCharts.
Investors can take heart in the company's performance during the ongoing economic slowdown brought about by higher interest rates. Just three portfolio companies representing 0.9% of the portfolio at cost were on non-accrual status at the end of September.
Realty Income
Realty Income (O +0.87%) is another stock for investors who appreciate a monthly dividend and steady raises. This net-lease real estate investment trust (REIT) recently raised its monthly payout for the 105th consecutive quarter.
NYSE: O
Key Data Points
With 13,282 commercial properties in its portfolio, Realty Income was already one of the world's largest net-lease REITs. A pending acquisition of Spirit Realty Capital for about $9.3 billion will add about 2,000 U.S. properties when the deal is completed, most likely during Q1 2024.
Shares of Realty Income offer a 5.4% yield at recent prices. The REIT has raised its payout by 16% over the past five years. The years ahead could be even better with the addition of Spirit's portfolio, which was 99.6% occupied at the end of September.
Realty Income's enormous size will allow it to pull off an all-stock acquisition of Spirit Realty and keep growing its payout. This REIT's reputation among lenders is so positive that it has an A3 rating from Moody's, which gives it a cost advantage that smaller REITs can only hope for. Put it together and this looks like a terrific stock to add to your portfolio now and hold over the long run.
