If you’re trying to secure a stream of passive income to support your retirement dreams, there’s more than one way to make it happen. Buying rental properties is an easy-to-understand option you’re probably already familiar with. Unfortunately, owning rental properties comes with day-to-day responsibilities that most retirees would rather avoid.
If you want to build a truly passive income stream, you’re probably much better off buying dividend-paying stocks and holding them over the long term. Pfizer (PFE 0.12%), PennantPark Floating Rate Capital (PFLT 0.27%), and Ares Capital (ARCC 0.18%) offer ultra-high yields that average 8.8% at recent prices. With an average yield this high, an investment of $11,400 spread evenly among them is enough to set you up with $1,000 in annualized dividend income.
1. Pfizer
If there’s one thing income-seeking investors can count on, it’s steadily rising demand for prescription drugs. As one of the world’s largest drugmakers, Pfizer has already raised its dividend payout for 15 consecutive years. At recent prices, it offers a 6.7% yield.
Pfizer’s share price tanked in 2023 in response to rapidly falling COVID-19 product sales. It’s remained depressed because some of its largest revenue streams, such as the oral blood thinner Eliquis, could lose patent-protected exclusivity over the next few years.
Upcoming patent cliffs will pressure the growth rate of Pfizer’s dividend payout in the coming decade. With plenty of new revenue streams coming online, though, they probably won’t stop the company from raising its payout for another 15 years.
Pfizer made a lot of investments with its COVID-19 vaccine windfall, and many are succeeding. In the first nine months of 2024, sales of its COVID-19 vaccine plummeted by 66% to $2.0 billion. Despite the loss, total revenue climbed by 3% year over year.
The FDA approved nine new drugs from Pfizer’s productive development pipeline in 2023. In the U.S., where those new drugs are already driving growth, product sales soared 27% year over year during the first nine months of 2024.
2. PennantPark Floating Rate Capital
PennantPark Floating Rate Capital is a business development company (BDC), which means it lends to mid-sized businesses. American banks have been less inclined to lend directly to businesses for decades.
Mid-sized businesses starved for capital borrow at rates you might find surprising. The average yield on debt investments in this BDC’s portfolio was 11.5% at the end of September.
At recent prices, PennantPark Floating Rate Capital offers an 11.1% yield and convenient monthly payments. The BDC has raised or maintained its payout since it started paying dividends in 2011.
This BDC’s underwriting team has a terrific track record. At the end of September, just two borrowers representing 0.4% of its portfolio were on non-accrual status.
3. Ares Capital
Ares Capital is the largest publicly traded BDC with a portfolio more than 13 times larger than PennantPark’s. At recent prices, it offers an 8.7% yield and the confidence that comes with a highly experienced underwriting team.
The average member of Ares Capital’s investment committee has been at it for 30 years, and the experience shows. At the end of September, just 1.3% of this BDC’s portfolio was on non-accrual status.
If you’re at all nervous about what’s in store for the U.S. economy, it’s hard to find a safer stock. Despite some serious economic downturns, Ares Capital boasts a cumulative net realized loss rate of 0% on investments over the past two decades.
If you include dividends, this stock delivered a 13% average annual return from 2004 through the present. Adding some shares to a diversified portfolio now to hold for the next 20 years looks like a smart move for just about any investor.
