Passive income is the dream for many investors. Who doesn't want to make money while they sleep? What's great is that the stock market offers investors an opportunity to generate passive income from their portfolios.
One way to do so is with dividend stocks. These companies distribute a portion of their profits to their shareholders on a regular basis. This steady income shows management's propensity to reward shareholders. It also helps the stock perform better overall.
In the report "The Power of Dividends: Past, Present, and Future," by Hartford Funds and Ned Davis Research, researchers found that dividends comprise a significant portion of the stock market's total returns over time. Since 1960, 85% of the S&P 500's cumulative return has been generated by reinvested dividends compounded over time.
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Companies that pay dividends outperformed non-dividend payers over a 50-year period, returning 9.2% on average versus 4.3%, respectively. Even better, companies that have consistently grown their dividends have performed, delivering annualized returns of 10.2%, with lower volatility.
Dividend-paying companies tend to have sound business models, strong fundamentals, and competitive advantages that enable them to grow their businesses over time. These companies can form a strong foundation for investors' portfolios. If you have $5,000 to invest, here are four dividend stocks to buy now.
The world's largest asset manager
BlackRock (BLK +2.24%) is the world's largest asset manager, renowned for its unmatched size and diversified product offerings. The company caters to investors of all kinds with its expansive platform and numerous iShares-branded exchange-traded funds (ETFs).
NYSE: BLK
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In addition to ETFs, BlackRock offers fixed-income and equity products, along with cutting-edge portfolio management technology through its Aladdin platform. With over $13.5 trillion in assets under management (AUM), BlackRock has a massive business that generates steady recurring revenue.
Long-term trends that benefit BlackRock include growing asset prices and rising 401(k) contributions, which help fuel steady growth in its asset base. BlackRock has demonstrated a commitment to shareholders by raising its dividend for 16 consecutive years.
A major player in global insurance
Chubb (CB +0.67%) is one of the world's leading insurers, providing property and casualty insurance across commercial, personal, specialty, and reinsurance markets.
What sets Chubb apart is its ability to balance risk and price its policies appropriately across the wide range of products it offers. This stellar underwriting ability enables Chubb to consistently generate profits from its core business, allowing it to grow in tandem with an expanding economy.
NYSE: CB
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Its global presence enables Chubb to select unique risks while also diversifying its client base, reducing its reliance on any single line of coverage. It also benefits from periods of rising interest rates. That's because its investment portfolio is heavily tilted toward fixed-income, which allows it to earn interest on its float.
The insurer has increased its dividend payout for 32 consecutive years, a testament to its sound business model, strong capital management, and commitment to rewarding shareholders.
A key cog in financial markets
S&P Global (SPGI +0.55%) has a business model that combines high margins and recurring revenue. As one of the top credit rating agencies in the U.S., S&P Global enjoys a strong market position alongside Moody's. Due to the difficulty of breaking into the industry, the two companies essentially have a duopoly over the market.
NYSE: SPGI
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Corporations, governments, and structured finance product issuers rely on credit rating agencies to provide opinions on companies and their ability to repay debts. Being in this position requires trust, which can take decades to build up. Because S&P Global is one of the few in this position, the company enjoys high margins and a steady stream of revenue from ongoing credit issuance.
S&P Global is well positioned to benefit from rising global debt issuance from both countries and corporations. It also has a robust data analytics business that provides alternative revenue when issuance activity slows. With over 53 years of raising its dividend payout, S&P Global is a Dividend King worth buying today.
A high-yielding dividend stock at a discount
Ares Capital Corporation (ARCC +1.64%) is the largest business development corporation (BDC) in the U.S. As a BDC, Ares Capital steps up to fill the hole left by major banks that have left the smaller private-lending markets in droves.
Ares Capital provides loans and structured finance to middle-market companies that traditional banks often overlook. The company leverages its scale and depth of expertise to underwrite these loans, which are primarily high-priority, senior-secured, and collateral-backed.
NASDAQ: ARCC
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More recently, investors have become nervous about private credit investments and BDCs, which lend to middle-market companies. This is due to the bankruptcy of First Brands and Tricolor Automotive, two large borrowers in the private-credit ecosystem. Ares Capital's management has stated that they don't have any exposure to those companies and that the quality of their portfolio remains stable.
The company has been lending to middle-market companies for more than two decades, with consistently strong performance over time, including during the Great Recession of 2008-2009. For investors comfortable with the risk, Ares Capital Corporation's 9.8% dividend yield makes it a very appealing high-yield stock for investors today.
