Collecting dividend income on a recurring basis can help strengthen your financial position and be a way for you to be less dependent on other sources of cash flow. The one downside is that many dividend stocks only pay on a quarterly basis, which means that you'll often be waiting multiple months before the next dividend payment.
One way you can get around this is by holding at least three dividend stocks in your portfolio. And by selecting ones which pay at different times of the year, you can ensure you're collecting a dividend on a monthly basis. Three high-yielding stocks that can be optimal for this strategy are Merck (NYSE: MRK), AT&T (NYSE: T), and Chevron (NYSE: CVX). Their businesses are solid, and they can be excellent investments to hang on to for years.
1. Merck
Drugmaker Merck pays a dividend every January, April, July, and October. Its yield is fairly high at 3.2%, which is more than double the S&P 500 average of 1.2%. And that high-yielding payout is sustainable, as Merck's payout ratio is around 64% of its earnings.
The big reason investors may be hesitant with Merck is due to its dependence on cancer drug Keytruda, which still accounts for around 45% of its revenue. The top-selling drug's key patents expire in 2028, but Merck has been acquiring businesses and building up its portfolio of drugs so that it can continue growing despite a possible decline in sales due to generics in the future.
Earlier this year, the Food and Drug Administration approved Winrevair, which is a promising treatment for pulmonary arterial hypertension. It could generate as much as $5 billion in revenue for the company by 2030, according to analyst estimates.
Merck has time to add to its diverse portfolio of treatments, and with the company generating $14.8 billion in free cash flow over the trailing 12 months, its strong financials put it in an excellent position to continue investing into new opportunities along the way; it has spent $7.7 billion on the dividend during the past year.
Trading at a forward price-to-earnings (P/E) multiple of only 10, Merck is a discounted stock that can make for an excellent income-generating investment to add to your portfolio.
2. AT&T
Telecom giant AT&T is another high-yielding dividend stock to add to your buying list. It makes dividend payments in February, May, August, and November. At 4.9%, its yield is the highest one on this list.
Investors have been bullish on AT&T this year, as the company has proven that it's a safer buy than many expected it to be, generating strong cash flow and showing that its high-yielding dividend is indeed sustainable. As of Monday's close, the stock is up 36% year to date.
Through the first three quarters of the year, the company has generated $2.4 billion more free cash flow than it did during the same period last year. While AT&T's business hasn't been growing at a rapid pace, the company has shown that it can be a stable and safe place to invest in.
Management sees more growth potential ahead and is planning to buy back $20 billion worth of shares over the next three years as a way of rewarding its shareholders. Buybacks reduce the share count and can lead to greater returns for investors.
3. Chevron
Oil and gas producer Chevron rounds out this list of strong dividend stocks. Its dividend payments arrive in March, June, September, and December. Together with the other stocks on this list, that can set you up to collect monthly dividend income. And at 4.4%, this is also a fairly high-yielding payout to add to your portfolio.
Chevron is a big name in oil and gas, and with impressive financials, its dividend looks rock-solid. The company's free cash flow over the past four quarters has totaled $18.8 billion, which is comfortably higher than the $11.7 billion it paid out in dividends during that time frame.
The company has a leaner cost structure than its peers, which has enabled it to offer a high dividend that it has also grown over the years. The stock's current quarterly dividend of $1.63 has increased by 37% over the past five years. And with more growth in the business on the horizon, investors are likely to see more rate hikes in the years ahead.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Merck. The Motley Fool has a disclosure policy.
