If you’re an individual investor trying to build a dividend income stream that can fuel your retirement dreams, there are two very different ways to make this happen. You can fill your portfolio with stocks that offer ultra-high yields up front, but dividend yields generally rise because the market isn’t expecting significant increases.
The other way to build your passive income stream takes longer, but can be a lot more effective over time. Companies like it Archer-Daniels-Midland (NYSE:ADM), Hercules capital (NYSE:HTGC)And Royalty Pharma (NASDAQ: RPRX) increase their payouts quickly. The returns they offer aren’t too exciting right now, but investors who hold them for the long term could have a huge passive income stream when they’re ready to retire.
Read on to see why investors will want to add these stocks to their portfolios and hold them for at least a decade.
1. Sagittarius-Daniels-Midland
Archer-Daniels-Midland (ADM) is a leading agricultural supply chain manager and processor. The stock offers a dividend yield of 3.4% at recent prices and the payout has grown 8.6% annually since 2020.
If you’ve eaten packaged foods lately, chances are ADM has purchased, transported or processed some of the ingredients. For decades, ADM has leveraged its vast global asset base to produce, process and transport agricultural commodities between more than 190 countries.
Many companies can mill soybeans, but it is not easy to do so at a price that attracts food producers. ADM is so well established that it is the cheapest source for many food manufacturers.
Commodity prices can fluctuate, but ADM’s economies of scale have allowed ADM to generate reliable profits in both good and bad economic times. Lower commodity prices in the first half of 2024 cut adjusted corporate profits by 30% year-on-year, but this is unlikely to stop the company from raising its dividend payout again in January.
Profits are down, but ADM still generated $3.16 billion in free cash flow over the last twelve months. It only needed 31% of this amount to meet its dividend obligation, leaving plenty of room to increase it further.
2. Hercules Capital
Hercules Capital is a specialized financier of start-up companies in the life sciences and technology industries. Buying equity stakes in disruptive companies before they start generating recurring revenue is extremely risky. That said, success for one can compensate for dozens of failures.
With equity interests in successful companies such as Palantir Technologies And Axsome TherapeuticsThis business development company’s (BDC) regular quarterly dividend has remained stable or increased since 2009.
As a BDC, Hercules Capital can avoid income taxes by paying out at least 90% of its profits as dividends to shareholders. To compensate for the large cash flows, an additional dividend is also paid out annually. Investors who buy Hercules Capital at recent prices could receive a 9.5% yield if both dividends remain stable through 2025. Even if Hercules cuts the supplemental dividend to zero, investors will receive a 7.9% yield from the regular quarterly payout.
Factoring in Hercules Capital’s additional dividend, shareholders have seen their quarterly payments increase by 50% since 2020. Earnings may not come in a straight line, but further dividend growth seems likely. The BDC invested $462 million in the second quarter, which was 27% more than a year earlier.
3. Royalty pharma
Royalty Pharma is another specialist financing company. Unlike Hercules, this one is aimed squarely at drugmakers who need help paying for clinical trials. However, instead of asking for monthly loan payments, it asks the drug makers for a percentage of their future drug sales. At recent prices, it offers a dividend yield of 3%.
It’s not unusual for startup biotech companies to burn through a billion dollars before they have products to sell. It didn’t happen overnight, but Royalty Pharma’s underwriters have proven their ability to figure out which ones are likely to produce successful drugs. The portfolio currently includes royalties on more than 35 commercial-stage products.
Royalty Pharma has deployed approximately $15 billion in capital since 2020, and its operations are growing. Approximately $2 billion was deployed in the second quarter alone.
Since 2020, Royalty Pharma has increased its dividend payout by 40%, and there are likely to be more big payout bumps in the coming years. The pharmaceutical industry’s favorite financial partner expects royalty revenues to rise 9% to 12% this year. With tons of recent investments that haven’t had a chance to mature yet, huge increases in dividend payments could be in your future if you buy this stock now and hold it for the long term.
Don’t miss this second chance at a potentially lucrative opportunity
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
-
Amazon: If you had invested $1,000 when we doubled in 2010, then you have $21,285!*
-
Apple: If you had invested $1,000 when we doubled in 2008, you would have $44,456!*
-
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $411,959!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns October 14, 2024
Cory Renauer holds positions at Axsome Therapeutics. The Motley Fool holds positions in and recommends Axsome Therapeutics and Palantir Technologies. The Motley Fool has a disclosure policy.
3 Dividend Growth Stocks to Buy Now for a Lifetime of Passive Income was originally published by The Motley Fool
