Investing in dividend stocks can be a great way to generate recurring passive income. Many companies pay dividends to their investors each quarter. Those payments can really add up.
For example, investing $5,000 across three high-quality, high-yielding dividend stocks could generate about $250 of annual dividend income:
Dividend Stock | Investment | Current Yield | Annual Dividend Income |
|---|---|---|---|
Oneok (NYSE: OKE) | $1,666.67 | 4.47% | $74.50 |
AT&T (NYSE: T) | $1,666.67 | 5.59% | $93.17 |
NNN REIT (NYSE: NNN) | $1,666.67 | 4.93% | $82.17 |
Total | $5,000.00 | 5.00% | $249.83 |
Data source: Google Finance.
Here's a closer look at why these companies make ideal income stocks.
More dividend growth is coming down the pipeline
Oneok is one of the largest diversified energy infrastructure companies in the country. It owns an extensive pipeline network and related infrastructure. These assets generate very predictable cash flow backed by long-term contracts and government-regulated rate structures. That provides Oneok with stable cash flow to pay dividends.
The company has delivered more than a quarter-century of dividend stability and growth. While it hasn't increased its payout every year during that timeframe, it has grown its dividend at a peer-leading pace of more than 150% over the past decade.
Oneok plans to return 75% to 85% of its cash flow from operations after capital expenditures to investors over the next four years. It aims to grow its dividend by 3% to 4% annually and repurchase $2 billion of its shares. The company plans to use the remaining excess free cash flow to strengthen its already strong balance sheet. With a high current yield and visible income growth, Oneok is a great option for those seeking income.
Back on a sound foundation
AT&T generates a lot of cash flow by providing wireless and broadband services to customers across the U.S. and Mexico. The telecom giant generated $9.1 billion of cash from operations during the second quarter and $4.6 billion of free cash flow after capital investments and vendor financing payments. That was more than enough cash to cover the company's roughly $2 billion quarterly dividend outlay.
The company is using its remaining excess free cash flow to repay debt. Its net debt has declined by $1.9 billion over the past quarter and $5.1 billion in the past 12 months. That's helping push down its leverage ratio, from 3.1 in the second quarter of 2023 to less than 2.9 last quarter. The company is on track to reach its 2.5 leverage target in the first half of next year.
AT&T has been focusing on strengthening its balance sheet in recent years. It cut its dividend by almost 50% in 2022 following the spinoff of its media business to retain additional cash to repay debt and invest in growing its business. Once AT&T reaches its targeted leverage level, the company will have more excess free cash it could return to shareholders. It could use that money to repurchase shares and pay a higher dividend.
An elite dividend stock
NNN REIT is a leading dividend stock. The real estate investment trust (REIT) recently reached its 35th consecutive year of increasing its dividend. Only two other REITs and less than 80 publicly traded companies have currently reached or exceeded that milestone.
The REIT generates very stable rental income. It focuses on owning freestanding properties triple net leased (NNN) to growing national and regional retailers. Those leases require that tenants cover all of a property's operating costs, including routine maintenance, building insurance, and real estate taxes.
NNN REIT pays out less than 70% of its stable income in dividends. It retains the rest to help fund new investments into income-generating retail properties. It also has a strong investment-grade balance sheet, giving it additional financial flexibility to continue expanding its income-producing retail real estate portfolio.
A great way to start generating passive income
Since many companies pay their investors a portion of their profits in dividends each quarter, they can be great ways to collect some extra income. Oneok, AT&T, and NNN REIT are three of the many high-quality dividend stocks out there that could allow you to pocket some extra cash each year.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Oneok. The Motley Fool has a disclosure policy.
