If you're an everyday investor who's concerned about having enough income in retirement, I've got some good news. One of the most effective ways to grow a passive income stream is also one of the easiest to manage.
A few minutes with the brokerage app on your phone is all it takes to set yourself up with a stream of dividend income that could grow throughout your retirement years.
Image source: Getty Images.
At recent prices, shares of Altria Group (MO +0.06%), Ares Capital (ARCC 0.84%), and AT&T (T 1.15%) offer an average yield of 8.5%. This means you can secure $1,000 of annual-dividend income by investing about $11,765 spread evenly among them. Here's why they look like a good deal that could get much better by the time you're ready to retire.
Altria Group
Altria Group is the U.S. tobacco giant that markets the leading Marlboro brand. At recent prices, the stock offers a big 9.6% dividend yield.
NYSE: MO
Key Data Points
Combustible cigarette smoking has steadily declined for decades, but nicotine consumption hasn't. By transitioning cigarette smokers to non-combustible products and raising prices for Marlboros, Altria Group has managed declining cigarette sales for decades.
The stock offers an enormous yield now because investors are nervous about the company's new e-cigarette product, NJOY, and its ability to compete against a slew of illicit products that still contain the fruity flavors that the Food and Drug Administration (FDA) banned in 2020.
The illicit market for flavored e-vapor products in the U.S. is still a problem for Altria Group, but it could become more manageable. In 2023, the FDA stepped up its effort to combat the illicit vaporizer market with efforts that include issuing over 100 civil money penalties and seizing dozens of international shipments.
This dividend stock probably won't be the fastest grower in your portfolio, but movement in the right direction for many years seems likely. Despite challenges from an illicit e-vapor market, Altria Group reported adjusted earnings that rose 2.3% in 2023. In February, management told investors to expect further earnings growth in a range between 1% to 4% this year.
Ares Capital
Ares Capital is America's largest business development company (BDC), which essentially means it's a lender for mid-market businesses throughout America. At recent prices, it offers a 9.5% dividend yield.
NASDAQ: ARCC
Key Data Points
As a BDC, Ares Capital must return at least 90% of its profits to investors as a dividend. This makes growth a challenge, but the company raised its payout by 20% over the past three years.
Direct loans to businesses are highly illiquid, and since the mid-90s, banks in America have been increasingly hesitant to lend to middle-market businesses even though they generate between $10 million and $1 billion in annual revenue. Since they're generally starved for capital, mid-market businesses accept interest rates that are probably a little higher than they need to be. The average yield the BDC received from debt securities was 12.5% at the end of 2023 even though 60% of its investments were first-lien or second-lien senior secured loans.
Ares Capital's underwriting team deserves a pat on the back. Inflation coupled with rising interest rates made 2023 a touchy year for lenders. Despite the challenges facing its borrowers, loans on non-accrual status at the end of 2023 represented just 1.3% of total investments at cost.
AT&T
AT&T cut its dividend by 47% in 2022 after spinning off its media assets and hasn't raised the payout yet. At recent prices, the stock offers a 6.5% yield plus a great chance for significant dividend growth down the road.
NYSE: T
Key Data Points
Landline revenue probably won't return, but the company is more than making up the difference with wireless-internet revenue. Total sales rose 1.4% last year driven partly by mobility-service revenue that climbed 4.4% in 2023.
Broadband-internet service could be an especially strong growth driver for AT&T in 2024 and beyond. Revenue from AT&T Fiber climbed 22% last year to $1.7 billion. It's way behind Verizon and T-Mobile, but the company finally launched a fixed wireless service, called AT&T Internet Air, near the end of 2023.
Last year, AT&T met its dividend commitment with less than 40% of the $16.8 billion in free cash flow its operations generated. This year, management expects free cash flow to rise to a range between $17 billion and $18 billion. With reliable revenue from broadband-internet subscribers pushing its needle forward, years of steady annual-dividend raises could be around the corner.
