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By Cory Renauer, The Motley Fool
Whether you're interested in outperforming the broad market or producing a passive income stream, dividend-paying stocks are what you want in your portfolio.
Nearly everyone knows that dividend payers deliver quarterly payouts, but that's not all they're good for. It's a well-documented fact that companies committed to distributing their profits usually outperform companies that don't have a dividend program.
During a 50-year period that ended in 2023, non-dividend-paying stocks in the benchmark S&P 500 index delivered a 4.27% average annual return. Over the same time frame, dividend payers in the same index delivered a 9.17% average annual return, or more than double that of their non-dividend-paying cousins, according to Hartford Funds and Ned Davis Research.
Investors who are nearing retirement, or simply eager to boost their passive income stream, may want to turn toward Pfizer (PFE -1.82%) and Ares Capital (ARCC -2.10%). Both offer ultra-high dividend yields that are more than triple the average yield of stocks in the S&P 500 index. Plus, there's a good chance they can maintain and raise their payouts further.
1. Pfizer
At recent prices, Pfizer shares offer a big 5.5% dividend yield and the confidence that comes with 15 years of consecutive annual dividend raises.
The pharmaceutical giant has raised its payout by a modest 16.7% over the past five years. With a slew of recently approved drugs to market and one of the industry's largest global sales forces to market them, more dividend raises could be on the way.
In the second quarter of 2024, Pfizer reported total sales that grew by just 3% year over year. If we exclude rapidly declining sales related to the company's COVID-19 products, though, revenue soared by 14% year over year.
Products that Pfizer acquired with COVID-driven profits are performing well. Sales of Padcev, a cancer therapy Pfizer gained through the $43 billion Seagen buyout last year, soared to an annualized $1.2 billion and could climb much higher.
Padcev earned approval to treat first-line bladder cancer patients in combination with Keytruda from Merck last December. Now that it's approved for newly diagnosed patients, who tend to stay on therapy longer than folks who have already relapsed, Padcev sales are expected to top out above $5 billion annually.
This year, Pfizer expects adjusted earnings to land in a range between $2.45 and $2.65 per share. This is more than enough to support a dividend payout currently set at $1.68 annually. With plenty of new drugs to keep pushing its big needle forward, investors can reasonably expect steady dividend raises throughout the coming decade.
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2. Ares Capital Corporation
Ares Capital is a business development company, or BDC. Income-seeking investors like these types of businesses because they can legally avoid federal income taxes by distributing nearly everything they earn to shareholders as a dividend.
Ares Capital's dividend payout hasn't risen in a straight line but it is up by 14.3% over the past five years. At recent prices, the BDC offers a juicy 9.2% yield.
For decades, U.S. banks have been increasingly hesitant to lend to mid-sized companies. Starved for capital, mid-sized businesses are often willing to borrow from Ares Capital at eye-popping interest rates.
At the end of June, 62% of Ares Capital's assets were first- and second-lien senior secured loans. These are first, and second, in line to be repaid in the event of bankruptcy. Despite a fairly conservative portfolio, this BDC's average yield on debt and other income-producing securities was 12.2% in the second quarter.
Ares Capital finished June with 525 portfolio companies, which was 10.5% more than it had a year earlier. With such a large list of contacts, this BDC's underwriting team has a leg up on nearly all its competitors when it comes to selecting businesses that are likely to repay their debts.
Expert underwriting was on display when Ares Capital reported second-quarter results. Just 1.5% of its portfolio at cost was on non-accrual status, compared to 2.1% a year earlier. Adding some shares of this BDC to a diverse portfolio and holding on for at least a decade looks like a very smart move to make right now.
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