If you want to secure sources of passive income that can fuel your retirement dreams, there are a lot of ways to make it happen. Buying rental properties is one of the most popular options, but the responsibilities of building ownership usually make this method a lot less passive than landlords wish it was.
Investors who want to build up a truly passive-income stream are probably much better off buying these dividend-paying stocks and holding them throughout their retirement years. With an average yield of 7.5% at recent prices, an investment of $13,330 spread evenly among them is enough to secure $1,000 in annual-dividend income in 2024.
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While $1,000 doesn't go as far as it used to, investors probably don't have to worry about inflation depleting the passive-income streams they receive from these three. The businesses underlying these stocks are still growing thanks to strong advantages over their competitors.
AT&T
AT&T (T 1.15%) slashed its payout in 2022 following the sale of its media assets, but the company still offers a yield that's miles above average. Shares of the telecom giant offer a juicy 6.5% yield at recent prices.
NYSE: T
Key Data Points
There was $129 billion in net debt on AT&T's balance sheet at the end of September, which isn't as frightening as it might seem. The company expects to achieve a manageable net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 2.5 in the first half of 2025.
Landline users are becoming scarce; they're being replaced by mobile and broadband-internet customers. The third quarter of 2024 was the 15th in a row with more than 200,000 new AT&T Fiber subscribers. We can expect this trend to continue too. The company expects the number of consumers and businesses in fiber-enabled locations to grow 25% above present levels to pass 30 million by the end of 2025.
Given its already immense size, AT&T probably won't be the fastest-growing business in your portfolio, but it could be a highly reliable dividend grower in a few years. As one of just three giant telecom service providers in the U.S., many of its broadband customers don't have any viable options.
At recent prices, you can buy AT&T stock for just 6.4 times trailing free cash flow. At this low multiple, investors can earn market-beating gains even if earnings stagnate forever. Given its position in America's telecommunications-industry oligopoly, a steadily growing bottom line seems far more likely.
Verizon Communications
Verizon (VZ 0.37%) is another debt-heavy telecom business with an unusually attractive dividend. At recent prices, the stock offers a 6.7% yield plus the benefit of knowing the underlying business never tried expanding into the unpredictable media industry.
NYSE: VZ
Key Data Points
Verizon's wireline-broadband service, FIOS, never took off, but its new fixed-wireless services are racking up new subscribers. The company ended Q3 with 10.3 million broadband subscribers, which was 21% more than it had a year earlier. The three months ended last September was the fourth quarter in a row that Verizon added over 400,000 net new broadband subscribers.
Spending heavily to expand its 5G infrastructure left Verizon saddled with $122.2 million in net unsecured debt. That works out to 2.6 times adjusted EBITDA. This level is manageable, but there isn't a lot of room for error.
In September, Verizon raised its dividend payout for the 17th year in a row. As one of three giant telecom businesses in America, there's a very good chance that rising broadband revenues will allow it to keep raising that payout for at least another decade.
Ares Capital
Ares Capital (ARCC 0.86%) is a business-development company (BDC) that offers a huge 9.4% yield at recent prices. With a portfolio recently valued at $21.9 billion, it's also the largest publicly traded BDC around.
NASDAQ: ARCC
Key Data Points
Ares Capital and other BDCs are popular among income-seeking investors because these specialized businesses can legally avoid paying income taxes by distributing nearly all their earnings to shareholders as dividends.
Since the Great Recession, America's largest banks generally avoid lending to businesses until they're big enough to have official scores from one of the credit-rating agencies. As a result, heaps of middle-market companies with between $10 million and $1 billion in annual revenue are starved for capital.
There are hundreds of thousands of mid-sized businesses in America, but Ares Capital's portfolio is limited to 490 companies that are backed by 228 corporate sponsors.
You'll be glad to know that just 2.1% of Ares Capital's diverse portfolio is invested in the risky food and beverage industry. At 23.2% of the portfolio, companies marketing software and related services are its largest industry concentration.
There are no guarantees, but investors who buy the stock now could see the dividend yield on their original investment rise above 10% in 2024. Smart underwriting has allowed Ares to raise its dividend payout by 20% over the past three years. Despite the raises, core earnings that reached $0.59 per share in Q3 were more than sufficient to cover a $0.48 per-share quarterly payout.
