Investing in companies that pay dividends is a great way to earn passive income.
However, not all dividend stocks are the same. Some companies have enticingly high dividend yields, but those can be risky investments as high dividends that aren't based on underlying profit growth could become unsustainable over extended periods.
If you're looking for a dependable passive income stream, you'll want to seek high-quality companies with solid fundamentals and strong capital management. Such companies increase their dividend payouts based on steady earnings growth. Investing in stable dividend growers allows you to ride out the highs and lows across economic cycles.
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Three companies with dependable dividends are Cincinnati Financial (CINF -0.87%), United Bankshares (UBSI -1.51%), and Realty Income (O -0.77%). Together, the dividends from these three stocks currently yield an average of 3.8%. If you spread $132,000 across the three stocks equally today, you could net over $25,000 in passive income over the next five years -- even without a dividend hike by any of the companies over this period.
Don't have that much to invest? Even an initial investment of $3,000 equally across the three stocks should net you over $550 in passive income annually. Here's what you need to know before buying these stocks.
1. Cincinnati Financial
Cincinnati Financial writes homeowners, property, and auto insurance policies. The company has done an excellent job of managing its risk while maintaining a solid balance sheet. As a result, the insurer has increased its dividend annually for 62 consecutive years, making it a member of the elite group of Dividend Kings.
During that period, it faced some challenges. For example, from 2008 to 2011, the insurer's combined ratio, a measure of how well a company underwrites policies, was 104%. That means it spent 4% more on expenses and claims than it was taking in from premiums. Despite this, the insurer's strong balance sheet allowed it to maintain -- and even grow -- its payout to investors.
In 2011, Steve Johnston took over as CEO, and its combined ratio improved, averaging just under 95%. That beat the industry average of 99%, a good sign for the business and investors. Cincinnati Financial has a dividend yield of 2.63%, and its history of increases makes this a dividend stock you can count on.
2. United Bankshares
United Bankshares serves customers across the mid-Atlantic region of the U.S., with branches in West Virginia, Virginia, Ohio, Pennsylvania, Maryland, Washington, D.C., and parts of the Carolinas.
Its dividend currently yields a solid 3.92%. The bank has increased dividends for 48 consecutive years, qualifying it as a Dividend Aristocrat if it were in the S&P 500 index. United Bankshares managed those increases thanks to its leadership, which has maintained strong asset quality and growth through numerous acquisitions. Since 1982, it has acquired 33 regional banks while maintaining profitability, allowing it to increase its dividend payout every year.
The bank has tailwinds working in its favor through higher interest rates. At the beginning of the year, management projected annual net interest income (NII) to come in at $780 million to $800 million, which would be a 7.7% increase from last year's NII on the high end. The company assumed the Federal Reserve would hike interest rates by 25 basis points twice during the year.
However, we know that the Fed has taken a much more aggressive stance, raising rates by 225 basis points over its last four meetings. Now the bank is guiding for NII of somewhere between $845 million to $865 million, a 16% increase on the high end. Its excellent record of raising its dividend consistently makes it another dividend stock you can count on.
3. Realty Income
Realty Income is a real estate investment trust (REIT) that acquires and manages properties, mainly in the retail space, using long-term lease agreements. Some of its largest clients include Walgreens, Dollar General, 7-Eleven, and Dollar Tree.
REITs can be excellent dividend stocks because they are legally required to pay out 90% of their taxable income to shareholders. As a result, they can deliver above-average yields to those looking for passive income through real estate. Realty Income has a dividend of 4.55% and has increased it for 27 consecutive, earning it Dividend Aristocrat status.
The company has a strict selection process for clients it leases to, which explains its long-term success. It also has a dividend payout ratio of 76.5%, conservative for REITs, which allows it to maintain its dividend if the business has a downturn, or to reinvest in the business for property acquisitions.
