Are you eager to improve your passive income stream with dividend-paying stocks? If so, finding high-yield options is easier now than it was just a few weeks ago.
The S&P 500 reached a new peak on July 16, and it's been mostly downhill since. When the U.S. market closed on Aug. 7, the benchmark index was about 8.3% below its recent peak.
A stock market sell-off isn't great for the performance of stocks already in your portfolio, but it's creating opportunities to buy shares of terrific dividend-paying businesses at a relative discount.
At recent prices, Pfizer(NYSE: PFE), PennantPark Floating Rate Capital(NYSE: PFLT), and Ares Capital(NASDAQ: ARCC) offer an 8.9% yield on average. That means an initial investment of $11,300 spread evenly among them is enough to set yourself up with $1,000 of dividend income over the next 12 months. Plus, there's a good chance that these well-managed businesses can raise their payouts in the years ahead.
1. Pfizer
With patent-protected market exclusivity for innovative new medicines, drugmakers tend to produce profits and pay dividends that grow reliably. Pfizer has raised its dividend payout every year since 2009; at recent prices, it offers a 5.8% dividend yield.
Sales of Pfizer's COVID-19 products fell faster than expected but not before the company reinvested heaps of the revenue they generated back into its development pipeline. For example, the pharma giant acquired Seagen, a cancer drug developer in late 2023 for about $43 billion.
The Seagen acquisition gave Pfizer access to four commercial-stage drugs, including Padcev. Last December, Padcev became a new treatment option for newly diagnosed bladder cancer patients. Pfizer reported second-quarter revenue from Seagen products that reached an annualized $3.4 billion, which was 55% more than Seagen reported in the previous-year period.
Marketed drugs gaining ground raised total Q2 revenue by 14% year over year if COVID-19 products are excluded. In addition to all the drugs it currently sells, Pfizer boasted over a dozen new medicines in phase 3 clinical trials as of July 30.
With heaps of experimental drugs in its pipeline and plenty of resources to market them, Pfizer could keep raising its dividend payout for another 15 years.
2. PennantPark Floating Rate Capital
PennantPark Floating Rate Capital is a business development company (BDC). For decades, America's largest banks have stepped back from lending directly to mid-sized businesses. BDCs are essentially lenders to middle-market businesses which are often willing to pay through the nose for access to capital.
Income-seeking investors like BDCs because they have to distribute nearly everything they earn to investors as a dividend. PennantPark Floating Rate Capital makes monthly dividend payments and offers a huge 11.4% yield at recent prices.
About 87% of PennantPark's portfolio consists of first-lien debt, which is first to be repaid in the unlikely event of bankruptcy. In Q2, the BDC reported a 12.1% weighted-average yield on its debt investments.
Generally, BDCs perform well right up until unexpected economic downturns ruin their borrowers' ability to make ends meet. With a brief exception in 2018, this BDC has been able to maintain or raise its dividend payout since 2011.
PFLT Dividend data by YCharts.
There are no guarantees, but investors can reasonably look forward to steady dividend payments for many more years. Among the 151 companies it's lent money to, just three representing 1.5% of its portfolio at cost were on non-accrual status at the end of June.
3. Ares Capital
Ares Capital is another BDC with a respectable dividend payout-raising track record. Its quarterly payment hasn't grown in a straight line, but it is up by 60% since the company began paying dividends in 2005. At recent prices, the stock offers a 9.5% yield.
With a portfolio valued at $25 billion, Ares Capital is the biggest publicly traded BDC you can buy shares of and one of the most stable. At the end of June, just 1.5% of total investments at cost were on non-accrual status.
Macroeconomic pressures could cause Ares Capital to lower its dividend payout in the years ahead, but it would need to be a disastrous downturn. Over the past 12 months, this BDC's average borrower reported earnings before interest, taxes, depreciation, and amortization (EBITDA) that was 1.6 times their interest expenses.
Nearly all of PennantPark Floating Rate Capital's borrowers pay interest at variable rates, but Ares Capital is a little more flexible. Only 69% of its portfolio collects interest at floating rates, which could be an advantage if the Federal Reserve cuts interest rates later this year. Adding some shares of this BDC to a diverse portfolio is a great way for most income-seeking investors to boost their passive income stream.
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Cory Renauer has positions in Ares Capital. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
