There's no wrong way to grow your savings with help from the stock market, but some tactics are more reliable than others. Over the past 50 years, and perhaps longer, dividend-paying stocks have wiped the floor with their non-dividend-paying cousins.
During the 50-year period from 1973 through 2022, the average dividend-cutting or eliminating stock in the S&P 500 index rose by just 3.95% annually. Over the same time frame, dividend-paying stocks in the same benchmark index returned 9.18% annually on average, according to Hartford Funds and Ned Davis Research.
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High dividend yields tend to signal high risk -- but not always. These three stocks offer an unusual combination of high yields and reliability. At recent prices, you can secure $500 in annual dividend income from each one for less than $18,980 in total.
Altria Group
Shares of Altria Group (MO 1.93%) offer a 9.6% yield at recent prices. At this level, just $5,225 is enough to set yourself up with $500 per year in annual dividend income.
It's not hard to see why Altria's stock price is under enough pressure to produce a high dividend yield. This tobacco giant markets the Marlboro brand in the U.S., where cigarette smoking has been in decline for decades.
Despite steadily declining cigarette sales volumes, Altria Group has raised its dividend 58 times over the past 54 years. It's able to swim against the tide with help from oral tobacco product sales that rose 2.3% year over year during the first nine months of 2023.
Sales of non-combustible nicotine delivery products are important to Altria's growth strategy, but not nearly as important as its ability to raise prices on Marlboro products. The company estimated a domestic cigarette industry volume decline of 8% year over year during the third quarter, but smokable product revenue net of excise taxes fell just 3.7% year over year.
Strict rules make it impossible to build competitive new cigarette brands. This gift from regulators should give Altria the pricing power it needs to offset volume declines for many years to come.
Realty Income
Realty Income (O 0.34%) is a gigantic real estate investment trust (REIT) that offers investors a 5.8% dividend yield. At recent prices, $8,630 worth of this REIT's shares is enough to set yourself up with $500 in annual dividend income.
Before acquiring Spirit Realty Capital for $9.3 billion this October, Realty Income was collecting around $4.5 billion in annual rent payments from 1,324 clients that lease a portfolio of more than 13,000 properties.
This company has been able to raise its dividend payout for 54 consecutive years, partly because its cash flows are highly predictable. Its average remaining lease term is around 9.7 years, and the company employs net leases that transfer variable costs of building ownership, such as insurance and taxes, to its tenants.
In addition to reliable growth, Realty Income offers investors monthly payments and frequent raises. This legendary REIT has increased its dividend payout 122 times since becoming a publicly traded company in 1994.
Realty Income's portfolio is so diversified now that a disaster for one or even a few of its largest tenants would only feel like a speed bump for its shareholders. Diversification helped it earn investment-grade credit ratings years ago. Those credit ratings keep its costs of capital lower than those of the REITs it competes with. This advantage could allow the company to raise its dividend payout steadily for at least another decade, if not longer.
Ares Capital
Ares Capital (ARCC 0.15%) is the U.S.'s largest publicly traded business development company (BDC). It offers a 9.8% yield at recent prices, so $5,130 is all it takes to secure $500 in yearly dividend income from this stock.
Ever since the global financial crisis, big banks generally avoid lending to all but the largest businesses. This leaves heaps of middle-market companies, which generally have between $10 million and $1 billion in annual revenue, starved for capital.
Ares Capital's dividend payout hasn't risen in a straight line, but it is up about 23% over the past five years. It could rise relatively sharply in the years ahead. The BDC's average yield on total investments rose about 17% year over year to 11.2% in the third quarter.
Around 69% of Ares Capital's investments collect interest at floating rates that increased sharply in 2022 and early 2023. The stock has been under pressure because the market is concerned about a wave of defaults that probably isn't going to happen. Loans on non-accrual status peaked at 2.3% of the total portfolio in the first quarter. This figure dropped to a very manageable 1.2% in the third quarter.
The Federal Reserve chose not to raise rates further during its last two meetings. Decreasing signs of inflation suggest more of the same in the months ahead. Now that the worst is over for its portfolio companies, Ares Capital could crank up its dividend in the quarters ahead.
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
