Investors eager to bulk up their passive income streams can do so without breaking the bank.
At recent prices, Hercules Capital(NYSE: HTGC), Altria Group(NYSE: MO), and AT&T(NYSE: T) offer an average yield of 8.5% at recent prices. That's high enough to turn an initial investment of $5,890 into $500 of annual dividend income.
There are plenty of dividend stocks with even higher yields right now. These three stand out because their underlying businesses appear capable of meeting their current obligations and raising their yields higher in the years ahead.
1. Hercules Capital
Hercules Capital is a business development company (BDC) that allows anyone with a brokerage account to participate in exciting venture capital investments. For example, Hercules invested in Palantir Technologies a few years before it began trading publicly. These days, Palantir boasts a stock market valuation above $50 billion.
Many of Hercules Capital's investments will fail, but winners like Palantir more than offset the losses. Since 2010, this BDC has doubled its regular quarterly dividend from $0.20 per share to $0.40 per share at the moment.
Each year, Hercules declares a supplemental dividend that it divides into four equal portions. Currently, investors are entitled to $0.08 per share of supplemental dividends per quarter. If the next supplemental dividend is the same, investors will receive a 9.9% yield from this stock in the year ahead.
Hercules shareholders can reasonably expect more Palantir-esque investments in the future. In the first quarter, the BDC made $956 million in debt and equity commitments, a new company record.
2. Altria Group
Altria Group is a giant tobacco company that markets the leading Marlboro brand throughout the U.S. Its first attempt at transitioning adult smokers to e-vapor products, Juul, was initially successful but ultimately doomed due to a ban on flavored vaporizers that the Food and Drug Administration (FDA) enacted a few years ago.
Altria Group offers a 9% dividend yield at recent prices. The stock is under pressure because investors are nervous about the company's ability to continue raising its payout. Total cigarette sales dropped by 10% in the first quarter.
Cigarette sales are down, but the amount of nicotine consumed is still rising at roughly the rate of population growth. Many consumers have transitioned to illicit flavored e-vapor products such as Elf Bar, but illicit e-vapor products will be harder to access from now on. The number of e-vapor import refusals monitored by the FDA shot up to 452 in the first quarter from just four in the previous-year period.
Altria Group is well positioned to benefit from increased enforcement of the FDA's flavor ban. Last year, it launched NJOY, which is the only pod-based e-vapor system approved by the FDA. The company shipped a million NJOY devices in the first quarter, plus 10.9 million consumable pods.
Despite declining cigarette sales and competition from an illicit e-vapor market, Altria Group expects adjusted earnings to grow by 2% to 4.5% this year. Its dividend payout probably won't be the fastest grower in your portfolio, but it's likely to keep moving steadily in the right direction.
3. AT&T
AT&T has far fewer competitors than Altria Group. Its fifth-generation (5G) wireless network was expensive to build, but it's one of just three options Americans have following T-Mobile's acquisition of Sprint in 2020.
As the second-largest member of America's three-way telecommunications oligopoly, AT&T is well positioned to provide steadily rising dividend payments. At recent prices, the stock offers a 6.6% dividend yield.
AT&T's broadband internet segment was losing wireline customers to its competitors' fixed wireless services. This trend reversed thanks to the rollout of AT&T's fixed wireless internet service late last year, plus the continued uptake of its fiber optic service for customers within range.
AT&T reported $16.8 billion in free cash flow last year, and this figure is expected to reach a range between $17 billion and $18 billion this year. That's enough to reduce its debt load significantly while maintaining its current dividend commitment. At its current rate of debt reduction, I won't be surprised if AT&T begins raising its payout again in 2025. Buying some shares of the telecom giant to hold over the long term is a great way to boost your passive income stream.
Should you invest $1,000 in Hercules Capital right now?
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.
