Investors who want to build a stream of dividend income that allows them to retire comfortably have a lot to smile about lately. Right now, a handful of top dividend payers are offering eye-popping yields.
The businesses underlying AT&T (T 1.02%), Ares Capital (ARCC 0.73%), and Altria Group (MO -0.37%) have what they need to meet their dividend commitments and raise them further. Luckily for us income-focused investors, the rest of the market isn't looking in their direction, thanks to an obsession with artificial intelligence (AI).
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These three stocks offer an average yield of 8.6% at recent prices. About $11,620 spread evenly among them is all it takes to set yourself up with $1,000 in annual dividend income.
AT&T
AT&T services far fewer landline telephones than it used to, but its telecom business is more relevant than ever. Steadily rising demand for mobile and broadband internet connections more than offset landline losses. The company reported total revenue that rose 1.4% last year.
In 2022, AT&T slashed its dividend in half to adjust for the sale of its media assets and still hasn't raised the payout. At recent prices, the stock offers a tempting 6.6% yield, and there's a good chance it will begin steadily raising the payout again soon.
Management expects to generate between $17 billion and $18 billion in free cash flow this year. That's more than double the amount it needs to meet its present dividend commitment.
Total revenue is growing slowly, but a shift to internet services could lead to growth at a mid-single-digit percentage over the long run. Consumer broadband revenue soared 8.1% in 2023 because of the continued popularity of AT&T Fiber. Last year was the sixth in a row that the company added over 1 million new fiber subscribers.
Ares Capital
AT&T's dividend yield is high, but Ares Capital sports an even higher yield of 9.5% at recent prices. This is a business development company (BDC), which means it can legally avoid paying income taxes by distributing nearly all its profits to shareholders as a dividend.
As a BDC, Ares Capital lends to middle-market businesses. In America, heaps of successful midmarket companies can't get big banks to return their calls despite having between $10 million and $1 billion in annual revenue.
Starved for capital, midsize businesses are generally willing to pay high interest rates. A majority of loans on Ares Capital's books collect interest at variable rates that have risen sharply over the past couple of years. As a result, the average yield it receives on total investments rose to 11.3% last year.
Interest rates that rose sharply in 2022 made it hard for some of Ares Capital's borrowers to keep up with payments, but the worst is already over. Just 0.6% of the company's portfolio at fair value was on nonaccrual status at the end of 2023. This figure peaked at 1.3% at the end of last March.
Altria Group
Altria Group is the U.S. tobacco giant that markets the leading Marlboro brand. Cigarette smoking has been declining in popularity for decades, but the pricing power that comes with its well-established brands allows it to offset the gradual losses.
Altria's stock price is under more pressure than usual because it's competing with flavored e-vapor products that the FDA has banned. At recent prices, the stock offers an eye-popping 9.8% dividend yield and a long history of steady raises. Last August, the company increased its dividend payout for the 58th time in 54 years.
Combustible cigarette volume declined 9.9% last year, in part because of competition with illicit vaporizers. Despite the challenge, Altria reported total revenue net of excise taxes that fell just 0.9% year over year.
By carefully controlling costs and repurchasing shares, Altria raised adjusted earnings per share by 2.3% last year. With such a high dividend yield up front, the stock can produce heaps of passive income even if its bottom line keeps plodding along at its present pace.
