Passive income through compound interest
In financial terms, passive income can be described as a one-time investment, which continually generates income, without requiring the investor to adjust or monitor their holdings. There is no doubt that dividend stocks are one of the simplest ways for investors to create passive income, which can sometimes cover their monthly expenses.
Dividend stocks allow investors to take advantage of the compound interest. According to Albert Einstein: ‘Compound interest is the 8th wonder of the world. He who understands it, earn it, he who doesn’t pays it’. It can be described as the addition of interest to the principal sum of the invested amount or in simple terms, interest on interest.
Compound interest is used to multiply wealth and it is achieved when dividends are being reinvested in the additional purchase of shares rather than pocketing the cash.
Is living off dividends possible?
Many of you would wonder if you could create a dividends stocks portfolio, which will allow you to live off dividends or at least to create another source of income, including covering off retirement goals, in order to improve your financial situation.
Creating a dividend stocks portfolio can be described as a marathon and takes a considerable amount of money. Therefore, you should have the urgency to both increase your income and save for retirement by starting immediately. One of the most relevant quotes when it comes to long-term investing is: “The best time to plant a tree was 20 years ago. The second-best time is today.”
Another key consideration when it comes to dividend investing is to focus on dividend growth stocks, stocks that increase their dividends annually and eventually increases your income effortlessly.
5-High dividend yield stocks to consider
A combination of high yield and stable outlook should get anyone’s attention. The past year of a frothy bull market has pulled attention away from the slow-and-steady dividend payers, but retirees and income investors still need to find lower-risk stocks that will generate cash returns regardless of market performance.
There’s no one-size-fits-all dividend investing strategy. But these five dividend stocks that produce strong yields without taking on too much risk are worth considering for any income investor.
1. Philip Morris International Inc. (PM)
Dividend Yield: 5.60%
Our first choice of high dividend yield stocks is Philip Morris international. The widely known tobacco brand is one of the leading companies in the tobacco industry. An important indicator of it’s stable performance-besides it’s considerable high dividend yield-is the fact that, PM offers 12 consecutive years of increased dividends. PM is a company which continually evolves by meeting the new trends of tobacco industry. Their latest campaign, called ‘Unsmoke’ transitions the company’s business to next-gen tobacco products such as vaping and combustible heated tobacco. It is worth mentioning that in it’s latest quarter, the Company outperformed analysts’ expectation and as a result it’s shares rose more than 5% following the earnings date.
PM’s core strengths, along with its ongoing price hikes to offset declining cigarette shipments, should help it generate stable returns for the foreseeable future. Tobacco industry volumes were hurt by Covid-19, as lockdowns and other social-distancing restrictions in certain key markets hurt demand but analysts expect its revenue and earnings to rise 9% and 16%, respectively, this year. According to Yahoo finance, it’s current Price/Earnings ratio is 16,67 and EPS at 5,15. Additionally, the Company rated as a ‘buy’ stock by analysts.
2. Enterprise Products Partners L.P. (EPD)
Dividend Yield: 8.20%
Enterprise Products Partners offers midstream energy services, including the collection, processing, and storage of natural gas and is our 2nd choice of high dividend yield stocks.
EPD is an MLP(Mater Limited Partnership) and pipeline stock, which shares fell by 30% during 2020, since it announced that the Company will be ramping up buybacks this year. Enterprise Products Partners have low-risk operations, reasonable leverage, and healthy project pipelines. In our opinion is a good choice for investors seeking to build a stable and high dividends portfolio since Enterprise Products Partners (NYSE:EPD) is a top energy-sector stock with solid performance and dividend growth histories.
Additionally, more than 85% of Enterprise Products’ earnings are fee based, making earnings relatively stable even when commodity prices are volatile. Currently, its current Price/Earnings ratio is 12,83 and EPS at 1,71. Additionally, the Company rated as a ‘strong buy’ stock by analysts.
PM’s core strengths, along with its ongoing price hikes to offset declining cigarette shipments, should help it generate stable returns for the foreseeable future. Tobacco industry volumes were hurt by Covid-19, as lockdowns and other social-distancing restrictions in certain key markets hurt demand but analysts expect its revenue and earnings to rise 9% and 16%, respectively, this year. According to Yahoo finance, its current Price/Earnings ratio is 16,67 and EPS at 5,15. Additionally, the Company rated as a ‘buy’ stock by analysts.
3. Verizon Communications Inc. (VZ)
Dividend Yield: 4.40%
Our 3rd choice is Verizon Communications, a North American Telecommunications Company, leading United states market in mobile subscribers. Due to the pandemic, the Company reported slightly lower revenue and profits in 2020 compared to 2019 but it has delivered a strong free cash flow through this challenging environment. It has achieved major popularity recently since Berkshire Hathaway reported that it has acquired an $8.6 billion stake in Verizon Communications.
The telecommunications and media giant recently reported fourth-quarter earnings and an outlook that were stronger than analysts expected. Net income was $4.72 billion, or $1.11 a share, down from $5.22 billion, or $1.23, in the year-earlier quarter. We believe that VZ has a place in this list because it is a strong brand and it has positioned itself to maintain that leadership in 5G. The company’s heavy investment into network infrastructure has made it the fastest and most reliable 5G network provider. According to Yahoo finance, it’s current Price/Earnings ratio is 13,25 and EPS at 4,30.
4. MPLX LP. (MPLX)
Dividend Yield: 11,17%
MPLX LP is another master limited partnership which was created by Marathon Petroleum with the purpose to own and operate that company’s midstream assets such as pipelines, terminals, storage for crude oil and natural gas. Usually, a dividend yield above 10% is a huge red flag. Although, despite continued headwinds in the energy market, the MLP is generating more than enough cash to cover its current payout and expansion program, which was evident in its fourth-quarter report and outlook for 2021.
Additionally, the Company has a healthy balance sheet and therefore its big-time payout appears to be on rock-solid ground. That is the main reason we have included this Company in our list.
5. AT & T
Dividend Yield: 7.03%
Last but not least, our 5th choice is AT&T, a leading communications company and definitely a dividend champion of 2021. What impressed us about AT&T is the fact that the Company has consistently increased its dividend over the last 34 years.
Moreover, the company reported free cash flow of $27.5 billion for 2020, despite the costs associated with its foray into media, and expects free cash flow of around $26 billion in 2021. Since the wireless business is growing, the company said 2020 was its best year for postpaid phone net adds in a decade, and it enjoyed the second lowest postpaid phone churn on record.
It’s high dividend yield appears to be sustainable since there is plenty of cash left over to continue paying down the debt associated with the major acquisitions of recent years and therefore this free cash flow is more than enough to cover AT&T’s generous dividend.
by Styliana Charalambous
Head of Market Research
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