You don't have to be retired to love dividends. Passive income is a plus for anyone and can be its own investing goal.
There's more than just passive income, though. Over the past few years, the market has had plenty of ups and downs, and there have been few certainties. Dividends provide stability for any portfolio, as long as you choose the right dividend stocks.
Ally Financial(NYSE: ALLY) and Prudential Financial(NYSE: PRU) are two excellent dividend choices to buy right now. Read on to find out why.
Ally: The up-and-comer
Ally is actually more than a century old, having started its life as the financial arm of General Motors. But it didn't become its own company, spun off from its parent, until 2009. That's when it became a bona fide bank, but with the experience and assets of an established auto loan giant.
It came into its own as digitization was taking over the world, and it was created to harness those opportunities. Today, it's the largest all-digital bank in the U.S. as well as the top prime auto lender. Those are hefty qualities for a relative newcomer (if you can call it that) and the 23rd-largest U.S. bank by assets.
Why is now a great time to buy shares of this Buffett stock? The Federal Reserve just lowered interest rates, and that's good news for banks.
While there are some benefits of high interest rates for banks, because they can invest money at higher rates, they also have to pay higher rates to depositors and keep up its spread to make money. They also deal with higher default rates as interest rates remain high.
The company's stock tanked last month after its chief financial officer let it be known that defaults were going to be worse than the company thought. A turn in rates will be good for Ally and should send the stock back up.
Why this bank? Because of the dividend, of course. Its dividend is generally higher-yielding than most of the larger banks, and at the lower stock price, it's quite high: 3.4% at today's price.
Is Ally stock risky if it miscalculated defaults? Remember that it has been doing this for a century. It's not messing around with new algorithms and risky plays. As interest rates come down and default rates improve, Ally will be in a much better place.
It has wowed investors before, and soon enough it should do so again. In the meantime, you can benefit from a juicy dividend.
Prudential: The rock-solid dividend
Many people recognize Prudential -- with its symbol, the Rock of Gibraltar -- as an insurance company. But it's even older than Ally, in existence for nearly a century and a half, and over time it has expanded into a full-scale wealth management company with many services and a thriving business.
Some of those services are providing even greater value than the core insurance products. The U.S. retirement strategies business is up 67% year to date as of the end of the second quarter, and private alternative capital deployment is up 35%. The broad services base and sophisticated investing platform generate business for Prudential no matter the economy.
Although it's a U.S.-based company, it has 50 million customers in 50 countries, with $1.5 trillion in assets under management. Since it's largely a money-based business managing investments, it has tons of cash flowing through it and a solid financial position. It's a classic, established dividend stock that's been paying its shareholders for more than 20 years.
Don't expect high growth from Prudential. This is a stock you should buy for the growing and stable passive income. It has all the qualities you would want in a pure dividend play: reliability, growth, and a high yield. The dividend has increased by 30% over the past five years, or a compound annual growth rate of 7%. It yields 4.3% at the current price, more than three times the average S&P 500 yield.
Prudential is also subject to impact from interest rates, but its rigorous credit management provides a cushion under any circumstance. With the economy in flux, you can count on Prudential's dividend.
Should you invest $1,000 in Ally Financial right now?
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Ally is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
