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Casinos and lotteries have been around for centuries, and the thrill of securing a quick win always draws crowds. Similarly, the media loves to discuss the success stories of investors, like buying Amazon (AMZN) stock in 1999. The odds of winning the lottery are incredibly slim, almost 1 in 176 million. Similarly, a lot of people may pick the right winners but give in to the volatility of the markets to sell. Very few would have actually held on to Amazon for decades to realize the big win.
According to the National Endowment for Financial Education, 70% of lottery winners end up bankrupt within a few years. In a similar manner, investors who score big on one stock often lose their proceeds through bad bets in search of similar success.
Instead of relying on your luck to achieve financial freedom, you can consider investing regularly to build a reliable stream of dividend income. While dividends may not provide the immediate gratification of winning the lottery, it can provide regular cash infusion, much like winning the lottery and selecting the annual payout. Let us now review three picks to grow your passive income through dividends.
Pick 1: BGR - Yield 6%
Sub-$1 gasoline disappeared in the 1990s, and $2 gasoline will probably never be seen again. The growing world population will ensure commodity prices keep rising to new highs. How can we generate income from this reality?
BlackRock Energy & Resources Trust (BGR) is a CEF that invests primarily in "big oil." It focuses on companies with market capitalizations over $10 billion and is most heavily weighted towards integrated companies. Source
BGR Fact Sheet
Energy has been really strong the past two years, and we expect this strength will continue as producers continue to benefit from strong fundamentals and much higher commodity prices than before COVID. At ~13.6% discount to NAV, BGR presents an excellent bargain to tap into the surging demand for energy.
Pick 2: BTI - Yield 10.3%
British American Tobacco (BTI) is the world’s largest tobacco company with a dominant presence in emerging markets like Bangladesh, Pakistan, and Indonesia where combustible products are highly popular. Fueled by the sticky and stable cigarette business, BTI is aggressively growing its new category products in developed nations and reported segment profitability two years ahead of schedule.
British American Tobacco Website
BTI is a Free Cash Flow machine, with £8.4 billion generated in FY 2023. This places the £5.1 billion annual dividend at a modest 60.7% payout ratio. The company utilized £3.3 billion towards deleveraging and other expenses.
March 2024 Investor Presentation
The tobacco company maintains an investment-grade BBB+ rating from leading credit agencies and is aggressively buying back shares following the sale of 3.5% of its stake in ITC Limited. BTI is currently the cheapest tobacco stock and sports a massive 10.3% yield with terrific dividend coverage.
Pick 3: PFFA - Yield 10%
Virtus InfraCap U.S. Preferred Stock ETF (PFFA) makes an excellent investment to obtain diversified exposure into preferreds. The ETF’s top holdings are high quality preferred securities, well-positioned to maintain payouts through the Fed’s hawkish rate policy. Source
PFFA pays monthly distributions, which were recently raised to $0.1675/month, reflecting a 10% annualized yield. The ETF’s composition makes it a must buy amidst quantitative tightening, and its structural and sustainable high yield makes it an excellent security to navigate rate cuts and low-interest environments.
Conclusion
The allure of winning the lottery can be tempting, but the odds of actually winning are slim. Lottery winners often have the choice to take the big payout or collect their winnings over the long term. Most lottery winners spiral down the path of financial doom due to poor financial acumen.
Investing in dividends forms a reliable path to financial freedom. By building and growing a portfolio of dividend payers, one can retire with a rich income stream that almost makes you feel like you won the lottery.
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