It doesn’t take a huge investment to produce significant levels of passive income with these stocks.
The past couple of years have been great for most stocks. With the benchmark S&P 500 index up by about 53% since the end of 2022, finding quality stocks that trade at reasonable valuations can be a challenge.
The search for stocks to buy is even harder for folks interested in earning a passive income from their investments. The average dividend-paying stock in the S&P 500 index offers an uninspiring 1.3% yield at recent prices.
Finding quality stocks that pay high dividend yields is harder now than it was a couple of years ago but it isn’t impossible. Shares of AT&T (T 0.55%), PennantPark Floating Rate Capital (PFLT 0.60%), and W.P. Carey (WPC 1.20%) offer yields above 5% at the moment.
With an average yield of 7.1% at recent prices, an investment of about $1,450 spread evenly among these three stocks is enough to set yourself up with over $100 in annual dividend payments. Better still, there’s a good chance these dividend payers can raise their payouts further in the years ahead.
AT&T
In September, AT&T agreed to sell its remaining stake in DirecTV to a private equity firm for cash payments that could total $7.6 billion. Now that it’s purely a telecommunications business, investors can expect predictable cash flows supporting its quarterly dividend.
AT&T froze its dividend in place after lowering it in 2022 to adjust for the sale of its media assets. At recent prices, the stock offers a 5.1% yield and there’s a good chance the company will soon begin raising its payout again.
Traditional wireline phone and broadband services are a thing of the past but these losses are more than offset by services enabled by the 5G and fiber optic infrastructure AT&T has invested in. In the second quarter, mobile service revenue rose 3.4% year over year to $16.3 billion, or about 55% of total revenue.
Second-quarter consumer broadband sales soared 7% year over year to $2.7 billion. It was the 18th consecutive quarter that AT&T Fiber added over 200,000 subscribers. With broadband and mobile internet trends moving in the right direction, a return to annual dividend payout bumps in 2025 seems likely. As one of just three U.S. telecom businesses with a nationwide 5G network, investors can also look forward to steady gains over the long run.
PennantPark Floating Rate Capital
PennantPark Floating Rate Capital is a business development company (BDC) that lends to mid-market companies earning between $10 million and $50 million annually. As its name implies, nearly every loan it originates collects interest at variable rates.
At recent prices, PennantPark offers an eye-popping 10.45% yield and monthly payments. With a brief exception in 2018, those payments have grown or remained stable since the BDC’s stock market debut in 2011.
Despite variable rates that soared over the past few years, hardly any of the loans PennantPark has originated are failing. Out of 151 portfolio companies, three representing 1.5% of the portfolio at cost were on non-accrual status at the end of June.
For decades, U.S. banks have shied away from direct lending, which gives PennantPark plenty of opportunities to expand its portfolio. During the three months ended June 30, the portfolio grew by 31% to $1.7 billion. With plenty of capital-starved mid-market businesses to choose from, this BDC’s best days are still in front of it.
W.P. Carey
W.P. Carey is a real estate investment trust (REIT) that used to own a lot of office buildings. Last year it spun out its office buildings as a new REIT named Net Lease Office Properties and lowered its dividend payment accordingly.
It didn’t take long for W.P. Carey’s payout to begin growing again. The REIT already raised its dividend by 1.7% in September and at recent prices, the stock offers a 5.9% yield.
Even after letting go of its office portfolio, W.P. Carey leases 1,291 buildings to 346 different tenants. It’s so well diversified that its largest tenant, a generic drug manufacturer named Apotex, is responsible for just 2.5% of the total rent payments the REIT expects in a year.
Some REITs manage the buildings in their property portfolios, but not W.P. Carey. This REIT employs net leases that transfer all the variable expenses associated with building ownership, such as maintenance and taxes, to its tenants.
With annual rent escalators written into long-term leases, shareholders can reasonably expect steadily growing cash flows from this REIT in the years ahead.
