If you want to start building a stream of passive income that can fuel your retirement dreams there's no need to wait until you have a huge lump sum of cash ready to invest. These days, $100 is more than enough to scoop up shares of three dividend-paying stocks that offer yields of 9.5% or better at recent prices.
The average stock in the S&P 500 index has been offering a 1.55% yield. Any time you see dividend stocks offering yields that are more than 6 times the benchmark average, you know the market is concerned about the underlying business and its ability to meet and raise dividend commitments.
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All three of these businesses have a history of meeting their dividend commitments. They might not be able to commit to rapid raises, but movement in a positive direction in the years ahead isn't an unreasonable expectation.
British American Tobacco
Cigarette sales volumes have been declining for decades, but British American Tobacco (BTI 1.31%) still raises its dividend consistently. At recent prices, it offers a 9.8% yield. Most American shareholders see their quarterly payments fluctuate with currency exchange rates but the payout has grown every year, in British pounds, since 2007.
NYSE: BTI
Key Data Points
Last year, British American Tobacco turned a lot of heads by writing down the value of its U.S. brands such as Newport and Camel by more than $30 billion.
Luckily for income-seeking investors, the noncash charges won't affect the company's ability to steadily raise its dividend commitment. Total revenue grew 3.1% last year at constant currency exchange rates. Its bottom line advanced even further with adjusted earnings per share that rose 5.2% at constant currency.
Sales of combustible cigarettes are on the way out, but overall delivery of nicotine is still rising. British American Tobacco's e-cigarette product, Vuse, is one of three brands currently authorized by the Food and Drug Administration (FDA) for sale in the U.S. market. Sales of Vuse and other new category products jumped 15.6% higher last year.
Altria Group
Altria Group (MO 0.78%) markets the leading brand in the U.S., Marlboro, and its shares offer a huge 9.7% dividend yield at recent prices. Despite declining combustible tobacco sales, it's been able to raise its dividend payout 58 times over the past 54 years.
NYSE: MO
Key Data Points
Altria sold its first attempt at e-cigarettes, Juul, last year and acquired NJOY, which is the only pod-based e-cigarette system authorized by the FDA.
In the fourth quarter, Altria shipped over 11 million NJOY pods. This is a fraction of the illicit market that offers fruity flavors that adults and teens appear to prefer but NJOY sales could shoot higher in 2024. The FDA started partnering with Customs and Border Protection to seize shipments of illicit vaporizers late last year.
Combustible tobacco sales are down but rising non-combustible sales combined with share repurchases still allow for growth on a per-share basis. Management expects earnings per share to rise 1% to 4% this year.
Ares Capital
Ares Capital (ARCC 1.37%) is a business development company (BDC), which means it lends to companies that are too big for small business loans but still too small to work with large banks.
NASDAQ: ARCC
Key Data Points
These specialized entities are popular among income-seeking investors because they legally avoid paying income taxes by distributing nearly all their profits to investors as dividends.
Ares Capital has a 14-year track record of delivering stable quarterly dividends. At recent prices, it offers a 9.5% yield. The BDC doesn't raise its payout as regularly as big tobacco companies but it has increased by 20% over the past three years.
Ares Capital can support a large dividend payout because American middle-market companies are generally starved for capital and willing to pay high rates that rose even higher in 2022 and early 2023. The average return on Ares Capital's debt investments rose to 12.5% last year from 11.6% a year earlier.
There are 505 companies in Ares Capital's portfolio and nearly all are backed by private equity sponsors. Relationships between its underwriters, private equity firms, and the midsize businesses it lends to are valuable assets. The giant BDC also benefits from an investment-grade credit rating.
The dividend you receive from Ares Capital might not rise quickly. With such a high yield up front, it doesn't have to rise much for long-term investors to realize market-beating gains over the long run.
