If you're nervous about retiring without enough passive you have more than a few options. Buying rental properties is a popular one, but those properties could lose money if you hire a property manager that doesn't maintain them or keep them occupied with paying tenants.
Investors looking to build a truly passive income stream are probably better off buying dividend-paying stocks. If you pick businesses that can continue growing their bottom line, you could receive a passive income stream that keeps rising without any extra effort from you.
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Pfizer (PFE 0.77%), Ares Capital (ARCC 0.29%), and AT&T (T 1.70%) look poised to produce steady earnings growth for at least another decade. Plus, they offer an average dividend yield of 7.6% at recent prices. That's more than five times the average yield you'd receive from dividend payers in the benchmark S&P 500 index.
The average yield from these stocks is high enough that an investment of $13,200 spread between them is more than enough to set yourself up with $1,000 in annual dividend income.
Pfizer
Shares of Pfizer have been beaten down about 37% over the past 12 months, largely because COVID-19 product sales evaporated faster than investors had expected. Luckily for income-seeking investors, the $44.2 billion reduction in annual COVID-19 product sales that Pfizer reported last year didn't derail the company's 15-year streak of consecutive annual dividend payout raises.
At recent prices, Pfizer offers a 6.5% yield. Thanks to wise investments the pharma giant made with its COVID-19 products, there's a good chance that it can continue raising its payout for another 15 years.
Over a dozen Pfizer drugs grew sales by 10% or better last year once adjusted for a stronger dollar. If we ignore tanking sales of its COVID-19 products, the company reported total revenue that rose by 7% last year.
Continued growth at a high single-digit annual percentage seems likely for Pfizer. The company received a record nine new drug approvals from the Food and Drug Administration last year.
Ares Capital
Ares Capital is America's largest publicly traded business development company (BDC). Ares and its BDC peers are popular among income-seeking investors because they don't have to pay income taxes as long as they return at least 90% of their earnings to investors as dividend payments.
At recent prices, Ares Capital offers a 9.5% dividend yield. Its quarterly payout hasn't risen in a straight line, but it is up by 20% over the past three years.
As a BDC, Ares Capital is essentially a lender to middle-market businesses that generally have between $10 million and $1 billion in annual revenue. Banks tend to ignore midsize businesses, so they're willing to pay eye-popping interest rates. At the end of 2023, Ares Capital's debt portfolio was earning a 12.5% average yield.
Around 60% of Ares Capital's portfolio is made of first and second-lien secured loans, which are first in line to be repaid in the event of bankruptcy.
Many years of slow but steady payout bumps seem likely for Ares Capital shareholders thanks to an underwriting department that deserves a gold star. At the end of 2023, 69% of Ares Capital's portfolio was collecting interest at floating rates. Despite interest rates that rose sharply in recent years, just 1.3% of the BDC's portfolio was on nonaccrual status at the end of 2023.
AT&T
AT&T might not show up when most investors screen for great dividend stocks, because the company slashed its payout by 47% in 2022 after selling off risky and unpredictable media assets. At recent prices, it offers a 6.8% yield and there's a good chance it can start raising that payout again soon.
Wireline telephone and internet revenue is drying up, but the company's investments in 5G infrastructure could work out well for long-term shareholders. The company grew wireless service revenue by 4.4% last year. Fiber sales soared 27% last year, and overall broadband internet sales could soar further in 2024. Late last year, AT&T launched a new fixed wireless service for customers in areas where Fiber still isn't available.
AT&T generated $16.8 billion in free cash flow last year, and profit is rising. In 2024, management expects free cash flow to land in a range between $17 billion and $18 billion. That's more than it needs to pay down debt and start raising its payout again.
