If you're an individual investor trying to set yourself up with a dividend income stream that can fuel your retirement dreams, there are two very different ways to make it happen. You could fill your portfolio with stocks that offer ultra-high yields upfront, but dividend yields generally rise because the market doesn't expect significant increases.
The other way to build your passive income stream takes longer, but it can be a lot more effective over time. Companies like Archer-Daniels-Midland(NYSE: ADM), Hercules Capital(NYSE: HTGC), and Royalty Pharma(NASDAQ: RPRX) are raising their payouts rapidly. The yields they offer aren't too exciting right now, but investors who hold them for the long run could have an enormous passive income stream when they're ready to retire.
Read on to see why investors want to add these stocks to their portfolios and hold them for at least a decade.
1. Archer-Daniels-Midland
Archer-Daniels-Midland (ADM) is a leading agricultural supply chain manager and processor. The stock offers a 3.4% dividend yield at recent prices, and its payout has grown by 8.6% annually since 2020.
If you've eaten packaged food items lately, there's a very good chance ADM purchased, transported, or processed some of the ingredients. For decades, ADM has leveraged its enormous global asset base to originate, process, and transport agricultural commodities between over 190 countries.
Lots of businesses can crush soybeans, but doing it at a price point that attracts food producers isn't easy. ADM is so well established that it's the least expensive source for many food producers.
Commodity prices can fluctuate, but ADM's economies of scale have allowed it to produce reliable profits in good economic times and bad. Lower commodity prices in the first half of 2024 lowered adjusted operating profits by 30% year over year, but this probably won't prevent the company from raising its dividend payout again next January.
Profits are down, but ADM still generated $3.16 billion in free cash flow over the past 12 months. It needed just 31% of this sum to meet its dividend commitment, which leaves plenty of room to raise it further.
2. Hercules Capital
Hercules Capital is a specialized financier of start-up businesses in the life sciences and technology industries. Buying equity stakes in disruptive businesses before they start recording recurring revenue is extremely risky. That said, success for one can offset dozens of failures.
With equity stakes in successful businesses such as Palantir Technologies and Axsome Therapeutics, this business development company's (BDC) regular quarterly dividend has held steady or risen since 2009.
As a BDC, Hercules Capital can avoid income taxes by distributing at least 90% of profits to shareholders as a dividend. To compensate for lumpy cash flows, it also declares a supplemental dividend each year. Investors who buy Hercules Capital at recent prices can receive a 9.5% yield if both dividends hold steady in 2025. Even if Hercules cuts its supplemental dividend to zero, investors will receive a 7.9% yield from the regular quarterly payout.
If we factor in Hercules Capital's supplemental dividend, shareholders have seen their quarterly payments rise by 50% since 2020. Gains might not occur in a straight line, but further dividend growth seems likely. The BDC invested $462 million during the second quarter, which was 27% more than a year earlier.
3. Royalty Pharma
Royalty Pharma is another specialized finance business. Unlike Hercules, this one is entirely focused on drugmakers that need help paying for clinical trials. Instead of asking for monthly loan payments, though, it asks drugmakers for a percentage of their future drug sales. At recent prices, it offers a 3% dividend yield.
It isn't unusual for start-up biotech businesses to burn through $1 billion before they have any products to sell. It didn't happen overnight, but the underwriters at Royalty Pharma have proven themselves capable of picking out which ones are likely to produce successful drugs. Its portfolio currently includes royalties on over 35 commercial-stage products.
Royalty Pharma has deployed about $15 billion worth of capital since 2020, and its activity is accelerating. It deployed about $2 billion in the second quarter alone.
Since 2020, Royalty Pharma has raised its dividend payout by 40%, and there will likely be more big payout bumps in the years ahead. The drug industry's favorite finance partner expects royalty receipts to rise by 9% to 12% this year. With heaps of recent investments that haven't had a chance to mature yet, huge dividend payment raises could be in your future if you buy this stock now and hold it over the long run.
Should you invest $1,000 in Archer-Daniels-Midland right now?
Before you buy stock in Archer-Daniels-Midland, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Archer-Daniels-Midland wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $845,679!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of October 14, 2024
Cory Renauer has positions in Axsome Therapeutics. The Motley Fool has positions in and recommends Axsome Therapeutics and Palantir Technologies. The Motley Fool has a disclosure policy.
