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3 High-Yield Dividend Stocks to Buy Now for a Lifetime of Passive Income

Motley Fool - Fri Apr 5, 5:12AM CDT

Individual investors generally fall into one of two camps. Some are concerned with optimizing their portfolio's performance, while others are more interested in building a stream of recurring income.

Regardless of which camp you're in, filling your portfolio with dividend-paying stocks is a great way to achieve your goal. Dividend-paying stocks tend to outperform shares of businesses that aren't committed to distributing a significant portion of their profits -- and the differences are dramatic.

Person looking at stock charts on laptop.

Image source: Getty Images.

During the 50-year period between 1973 and 2023, dividend-paying stocks in the benchmark S&P 500 index generated a 9.17% average annual return. The average annual return produced by non-dividend payers in the same index was just 4.27% over the same time frame, according to Ned Davis Research and Hartford Funds.

Pfizer(NYSE: PFE), Ares Capital(NASDAQ: ARCC), and Realty Income(NYSE: O) are dividend-paying stocks that offer above-average yields. They stand out because there's also a good chance they can continue raising their payouts for many years to come.

Pfizer

Shares of Pfizer have fallen around 32% over the past 12 months, mostly due to COVID-19 product sales that fell much faster than expected. The swift loss of sales for Paxlovid and Comirnaty led to an earnings contraction, but it didn't affect the company's dividend payout raising streak.

Last December, Pfizer raised its quarterly dividend payout for the 15th year in a row. At its recently beaten-down price, the stock offers an eye-popping 6.1% yield.

Management expects adjusted earnings to rise sharply this year to a range between $2.05 and $2.25 per share. That's heaps more than the company needs to meet its dividend commitment, which is currently set at $1.68 annually.

Sales of non-COVID products rose 8% year over year in the fourth quarter. Thanks to the recent acquisition of Seagen, investors can look forward to further growth from Pfizer's oncology division. Management expects its roster of blockbuster cancer medicines to soar from five today to more than eight in just a few years.

Ares Capital

Ares Capital is America's largest publicly traded business development company (BDC). These specialized entities are popular among income-seeking investors because they can legally avoid paying income taxes by distributing at least 90% of their earnings to shareholders.

At recent prices, Ares Capital offers a big 9.3% dividend yield. The BDC's payout hasn't risen in a straight line, but it is up by 20% over the past three years.

For decades, American banks have been increasingly hesitant to lend to mid-market businesses, which by definition generate between $10 million and $1 billion in annual revenue. Starved for capital, mid-market businesses are generally willing to pay high interest rates for secured loans.

Ares Capital reported an average yield on debt and income-producing securities that rose to 12.5% in the fourth quarter of 2023. These days, people with good credit scores can find unsecured personal loans at similar rates. With this in mind, you might be shocked to learn that 60% of Ares Capital's portfolio is made of first- and second-lien senior secured loans, which are first in line for repayment in the unlikely event of a bankruptcy.

Realty Income

Realty Income is a giant real estate investment trust (REIT) that invests in commercial property. At recent prices, it offers a juicy 5.8% dividend yield and monthly payments that rise every quarter.

REITs receive tax advantages similar to BDCs in return for distributing earnings as dividends. Despite retaining very little income, Realty Income grows its business steadily in good times and bad. In March, the company raised its dividend payout for the 124th time since becoming a publicly traded company in 1994.

Long-term Realty Income shareholders realized market-beating returns because the REIT doesn't give leases to every type of business that comes calling. Instead, it prefers properties that are likely to perform well in any economic environment. Grocery stores, convenience stores, and dollar stores are responsible for 28.7% of annual rent payments.

Realty Income benefits from investment-grade credit ratings that allow it to borrow at lower interest rates than all but a handful of its competitors. Enviable credit ratings should help it grow its portfolio, and in turn its dividend payout, steadily throughout your retirement years.

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Cory Renauer has positions in Ares Capital. The Motley Fool has positions in and recommends Pfizer and Realty Income. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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