Want $500 of Passive Income? Invest $15,000 in 1 of these dividend stocks
IInvestors seem to be concerned about only one thing this year: inflation. They are right to be worried. The consumer price index (CPI), a measure of inflation, reached 8.3% on an annualized basis in April (not seasonally adjusted). High inflation can create a tricky environment for investors.
When inflation gets high like this, investors often look to dividend-paying stocks as a good source of returns. According to Fidelity, dividend-paying stocks make up about 40% of the S&P500‘s total returns every year, on average, since 1930. However, when inflation was high in the 1940s and 1970s, dividend-paying stocks accounted for more than 65% of total market returns every year.
In times of inflation or normal times, dividend stocks can also be a great source of passive income. A $15,000 investment in one of these three dividend-paying stocks — Prudential Financial (NYSE: PRU), United Bankshares (NASDAQ:UBSI)and American bank (NYSE:USB) – could bring you $500 or more a year in passive income and help you fight inflation. Let’s find out a little more about these three actions.
1. Prudential Financial: $684 annual passive income on a $15,000 investment
Prudential Financial manages investments for institutions and individuals, creates and sells retirement income products such as annuities, and underwrites insurance policies such as life insurance and group disability insurance.
The pandemic has been difficult for Prudential’s business, and in 2020 the company posted its first annual loss in seven years. The company’s group insurance and individual life business has struggled due to increased claims related to the COVID-19 pandemic. It also struggled in the low interest rate environment, which negatively impacted its investment income. Management saw this and ruthlessly focused on improving the business, cutting back on less profitable products and expanding into businesses less sensitive to market conditions.
One of the goals set in 2020 was to reduce costs by $750 million by 2023. To achieve this, Prudential sold several businesses, including its Korea and Taiwan operations and its full-service retirement business. These measures, and others, brought it closer to its 2023 goal, with $635 million in cost savings through the end of 2021.
Prudential Financial is well positioned with a strong balance sheet with $3.6 billion in liquid assets through the end of the first quarter. It will bring in an additional $4 billion in revenue from businesses sold during the second quarter.
Investors will reap the rewards of this strong balance sheet, as Prudential expects to return $11 billion to shareholders from 2021 to 2023. In 2021, it paid out $1.8 billion in dividends and has a very manageable payout ratio of 37 .2%. The company also increased its dividend by 4% in the first quarter, marking 14 consecutive years of dividend increases. The stock offers investors a dividend yield of 4.56%.
2. United Bankshares: $576 annual passive income on a $15,000 investment
United Bankshares provides banking services to customers throughout the Mid-Atlantic region of the United States. It has branches in West Virginia, Virginia, Washington, DC, Ohio, Pennsylvania, Maryland and parts of the Carolinas. United Bankshares has grown its business primarily through acquisitions, which it has done very well. Since 1982, the bank has acquired 33 small regional banks. He shut down Community Banker Trust Corp. last year, adding more branches in Virginia and Washington, D.C.
United Bankshares’ growth-by-acquisition strategy has paid off for investors. The bank has increased its dividend every year for 48 consecutive years and would be considered an aristocrat dividend if he was a member of the S&P500. It pays $1.44 per share per year in dividends and the payout ratio is a very manageable 53%.
The bank should also benefit from higher interest rates. Last year, the federal funds rate, the benchmark interest rate at which banks lend money to each other, fluctuated between 0% and 0.25%. The Federal Reserve has raised that rate twice so far this year, bringing it between 0.75% and 1%. The market expects this rate to exceed 2.8% by the end of this year.
Banks traditionally make money on the difference between interest paid on deposits and interest earned on loans, called net interest income (NII). United Bankshares predicts that the NII could increase by 8% to 10% this year due to higher rates.
The stock offers investors a dividend yield of 3.84%.
3. US Bancorp: $534 annual passive income on a $15,000 investment
US Bancorp also provides banking services, in 2,200 branches spread across the Midwest and Western regions of the United States. It also happens to be one of Berkshire Hathawaythe 10 largest holdings of (by stock value).
The bank has a strong balance sheet that can help weather economic downturns. The Common Equity Tier 1 (CET1) ratio is a measure that regulators use to see how well a bank can cope with unexpected losses. It measures a bank’s capital base divided by its risk-weighted assets, and banks must have a minimum ratio of 7%. US Bancorp’s CET1 ratio is healthy at 9.8%.
With a strong balance sheet in hand, US Bancorp patiently waited for interest rates to rise before it could take advantage. Last year, the bank sacrificed short-term net interest income gains to take advantage of a larger opportunity for higher interest rates in 2022 and 2023. The NII is expected to rise by 3, 3% over the next 12 months if interest rates rise another 2% from here and could gain even more if lending activity picks up.
The bank pays a quarterly dividend of $1.84 per share per year. This payout provides investors with a dividend yield of 3.56%. The payout ratio is a very manageable 40.5%.
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Courtney Carlsen has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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