The internet is awash with claims that the secret to financial independence is buying real estate and renting it out as "passive" income. The problem with real estate investing is that it is not as passive as the internet claims. Maintaining a rental property requires work, as landlords must manage tenants, fix damage, and continuously search for occupants.
There are better ways to generate passive income with your savings. Enter dividend stocks. These are stocks that regularly give shareholders cash payments in the form of dividends. And the best part is, it is actually passive income, requiring zero work on your part. All you have to do is click the buy button, hold on to your shares, and, like magic, you have a new income stream.
Forget buying a rental property. With $50,000, you can buy these two stocks and get approximately $4,500 each year in passive income.
NYSE: MO
Key Data Points
1. Altria Group: Price increases and selling minority stakes
Our first stock is Altria Group (MO 0.85%). This is a tobacco stock that sells Marlboro cigarettes (and others) in the United States, which is the largest driver of profits for shareholders. On top of cigarettes, the company owns cigar brands, nicotine pouches, and a vaping business, although they are much smaller than cigarettes today.
Cigarette volumes have been declining in the United States for the last few decades. This is good for society, but bad for a company like Altria. So what are they to do? Raise prices, of course. Altria has been able to raise the price of cigarette packs for many years to counteract volume declines. This has led to consistent growth in operating income and cash flow, which is what fuels its large dividend payout.
Altria Group owns a large stake in Anheuser Busch, the global beer company. It has started to sell off part of this stake in order to fuel share buybacks, which decrease Altria's outstanding shares. Why is this important for dividend investors? If Altria has fewer shares outstanding, it can raise its dividend payout per share while still paying the same nominal dividend each year. If the dividend per share gets raised, your passive income gets raised as well.
As of this writing, Altria stock has a dividend yield of 8.58%. That means if you use $25,000 -- half of the theoretical $50,000 pile -- to buy shares of the stock, the company will pay you $2,145 each year in dividend income. This is a dividend that has grown by 100% in the last 10 years. You can benefit without putting in any work yourself.
MO Dividend Yield data by YCharts
2. British American Tobacco: betting on a new generation
The second stock in this pairing is British American Tobacco (BTI 0.20%). Like Altria, it is one of the world's largest tobacco companies, and it has counteracted volume declines for years by consistently raising prices. It owns brands including Camel, Newport, and Lucky Strike and sells products in many countries around the world.
NYSE: BTI
Key Data Points
However, unlike Altria, British American Tobacco's non-cigarette business units are a sizable portion of its operations. These "new categories" (as the company calls them) generated $4.2 billion in revenue last year and are growing rather quickly. These are nicotine products, such as nicotine pouches or e-vapor. These brands have collectively turned a profit and should help the company further counteract volume declines with cigarettes.
British American Tobacco's dividend yield is 9.37%, slightly higher than Altria's. A $25,000 investment into shares of the stock will give you an annual dividend income of $2,342.50. With the continued growth of the new categories segment, I would expect the company's dividend per share to grow this decade as well.
Add it all together, and a $50,000 investment into these two nicotine conglomerates can generate approximately $4,500 in passive income in the form of dividends each year for investors. That's at current share prices, of course. These investments require almost zero work to maintain as a shareholder, which contrasts drastically with the work that needs to be done to maintain rental properties.
Real estate can be a great investment for some people. But for those looking to build truly passive income, you might want to look at buying dividend stocks with your hard-earned savings instead.
