Would you like to get your money to start working for you but without any of the day-to-day responsibilities that come with owning rental properties? If so, I have some great news for you. Buying dividend stocks is one of the safest and easiest strategies for building wealth and generating a stream of passive income.
Picking dividend stocks that outperform is probably easier than you think. Companies in the benchmark S&P 500 index that initiated a dividend or grew their payout over the 50-year period from 1973 through 2022 delivered a 10.24% average annual return. Over the same time frame, the average non-dividend-paying stock in the same index fell by 0.6% annually, according to Ned Davis Research and Hartford Funds.
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Not all dividend stocks are created equal, and it stands to reason that selecting the best ones gives your portfolio a great chance to outperform. These two stand out because they offer a high yield up front, and there's a good chance they'll be able to raise, or at least maintain, their payouts for the foreseeable future. Read on to see how they could become top-contributing members of your income-generating portfolio.
AT&T
Shares of telecom giant AT&T (T -0.44%) offer investors a juicy 7.8% yield at recent prices. An investment of $1,272 is all it takes to secure $100 in annual dividend income from the stock.
Now that it's shed all its risky media assets, income-seeking investors can look forward to steady payouts that could grow significantly in the years ahead. AT&T isn't installing many landlines these days, but heaps of new high-speed internet connections for businesses and mobile devices could drive steady growth of its bottom line.
In the 36 months leading to the end of this June, AT&T added more than 8 million postpaid phone subscribers. Over the same time frame, it added 3.4 million fiber internet subscribers. As a result, quarterly fiber revenue has doubled to reach $1.5 billion.
Steady subscriber growth coupled with new cost controls helped second-quarter free cash flow to rise more than 30% year over year to $4.2 billion, and management expects at least $16 in free cash flow for all of 2023. That's twice as much as the company needs to meet its dividend commitment, which suggests a significant payout raise could be around the corner.
PennantPark Floating Rate Capital
If you don't like waiting three months between dividend payments, consider PennantPark Floating Rate Capital. (PFLT 0.28%). This business development company (BDC) makes monthly payments, and it offers an eye-popping 11.3% yield at recent prices.
With such a high yield, about $884 is all it takes to buy enough shares of PennantPark to produce $100 in annual dividend income. As its name implies, PennantPark issues debt to privately held businesses at floating interest rates that have risen a great deal over the past year and a half.
The average yield on PennantPark's debt investments rose to 12.4% at the end of June from just 8.5% a year earlier. Rising interest rates can be a double-edged sword for lenders if borrowers can't keep up with the rising payments. Over the years, PennantPark has limited risk by focusing on cash-generating middle-market businesses that also have private equity sponsors.
PennantPark's risk-management strategy appears to have worked as intended. Despite rapidly rising rates, just three portfolio companies representing 1% of its overall portfolio on a cost basis were on non-accrual status at the end of June.
Just three out of 130 companies in PennantPark's portfolio are struggling to make loan payments despite interest rates that have surged over the past year and a half. Investors will want to keep one eye on this space, but for the moment, it appears this BDC's underwriters are worth their weight in gold. Putting some shares in your portfolio now looks like a smart move.
