The old adage is true: It takes money to make money. That's certainly the case when it comes to generating passive income. Most sources require an upfront investment to get the income train chugging along. However, once the income starts flowing, it can be meaningful.
Investing in dividend stocks is one of the quickest, and easiest, ways to start collecting passive income. Here's a look at what a $10,000 investment across three top dividend stocks could produce in a year:
Dividend Stock | Investment | Current Yield | Annual Dividend Income |
|---|---|---|---|
Oneok (NYSE: OKE) | $3,333.33 | 4.94% | $164.67 |
Verizon(NYSE: VZ) | $3,333.33 | 6.34% | $211.33 |
W.P. Carey (NYSE: WPC) | $3,333.33 | 6.13% | $204.33 |
Total | $10,000.00 | 5.80% | $580.33 |
Data source: Google Finance. Dividend yields as of March 29, 2024.
Their average dividend yield is significantly higher than the typical dividend stock (the S&P 500's dividend yield is 1.3%). On top of that, this particular trio has a knack for increasing their dividends, suggesting investors should be able to collect a steadily rising income stream in the coming years.
Another great thing about dividend stocks is you don't need a lot of money to get started generating income. It only costs between $40 and $80 to buy a share of Oneok, Verizon, and W.P. Carey. That enables you to start small and slowly build your passive income portfolio.
Here's a look at why these dividend stocks are great income building blocks to consider buying this April.
Your pipeline to passive income
Oneok has been a model dividend payer. The pipeline stock has delivered more than a quarter century of dividend stability and growth. While it hasn't increased its payout every year, the dividend has steadily marched higher. Over the past decade, Oneok has delivered a more than 150% increase in its payout.
The pipeline company expects to continue growing its payout in the future. Its target is to deliver 3% to 4% annual growth. Several factors fuel that view.
Oneok is coming off a transformational year. It closed its $18.8 billion acquisition of Magellan Midstream Partners last year, which diversified its operations while setting the stage for future free cash flow growth. On top of that, it's investing in several high-return organic expansion projects. It recently approved a $355 million expansion of its Elk Creek Pipeline that should enter service by the first quarter of next year. Meanwhile, it's progressing toward approving its Saguaro Connector Pipeline, aiming to start construction later this year. Combine these growth catalysts with its strong financial profile, and Oneok should have the fuel to deliver steady dividend growth in the coming years.
A cash-gushing machine
Verizon also has an excellent track record of increasing its dividend. The telecom giant delivered its 17th straight year of dividend growth in 2023, the longest current streak in the U.S. telecom sector. While Verizon is growing its payout at a modest pace of about 2% annually in recent years, it should continue its slow and steady trudge higher.
The mobile and broadband company generates lots of cash to fund its expansion, pay dividends, and strengthen its balance sheet. It produced $37.5 billion of cash flow from operations last year, funding its capital investments ($18.8 billion) and dividend ($11 billion), with $7.7 billion to spare. That excess free cash flow enabled Verizon to strengthen its already solid financial profile.
Verizon's cash flow should rise in the future as its capital investments to build out its faster 5G network start paying off. Meanwhile, costs are coming down as it moderates capital spending ($17 billion to $17.5 billion in 2024) and cuts operating costs ($2 billion to $3 billion by 2025). These initiatives should boost its free cash flow, giving it more money to pay dividends and bolster its balance sheet.
Resuming growth after the great reset
W.P. Carey is coming off a quarter century of annual dividend increases. Unfortunately, that streak ended late last year after the real estate investment trust (REIT) cut its payout by about 20%. It made that move following the sale and spinoff of its office properties. The company reset its payout to reflect its lower earnings and to increase the cash flow it retains to help fund new investments.
However, W.P. Carey has already gotten back on the dividend growth bandwagon this year. It expects to deliver a rising dividend in the future as it increases its rental income. The REIT is in the process of recycling the proceeds from its office sales, and other recent sales, into new investments in healthier sectors, such as industrial, that should grow its rental income.
The company believes its repositioned portfolio and stronger financial profile will put its dividend on an even stronger long-term foundation. Its focus on faster-growing sectors should enable it to grow its rental income (and dividend) at higher rates in the future.
Great ways to generate passive income
Oneok, Verizon, and W.P. Carey offer higher dividend yields, enabling you to generate more income per dollar invested. In addition, those payouts should steadily rise in the future. These characteristics make them ideal ways to start building a growing stream of passive income.
Should you invest $1,000 in Verizon Communications right now?
Before you buy stock in Verizon Communications, 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 Verizon Communications wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
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. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of March 25, 2024
Matt DiLallo has positions in Verizon Communications and W.P. Carey. The Motley Fool recommends ONEOK, Verizon Communications, and W.P. Carey. The Motley Fool has a disclosure policy.
