7 Ways to Earn 4% to 6% from Dividend-Paying Stocks

Bonds aren't the only investments that generate regular income. You might want to consider select high-income stocks. Preferred stocks are a way for companies to raise equity capital instead of taking on debt by selling bonds. Shareholders in preferred stocks have a higher legal claim to a company's assets and earnings than do its common shareholders, and preferred dividends take precedence over a company's payment of common dividends. Preferreds are typically issued with fixed dividends, so the securities tend to act as bonds do, fluctuating in price with market interest rates.

Earnings for All

• 35 Ways to Earn Up to 11% on Your Money
• Short-Term Accounts: 1%-2%
• Muncipal Bonds: 2%-3%
• Investment-Grade Bonds: 3%-4%
• Foreign Bonds: 3%-5%
• High-Yield bonds: 3%-6%
• Dividend-Paying Stocks: 4%-6%
• Real-Estate Investment Trusts: 4%-9%
• Closed-End Funds: 4%-9%
• Master Limited Partnerships: 8%-11%

The common stocks of electric, gas and water utilities have long been favorites of income hunters. As with other income vehicles, they face more risk of price declines as interest rates rise. But if income is your priority, focus on the prospects for a consistent payout rather than on stock-price volatility (see Steady Income from Volatile Sources). Telecom giants are also fertile hunting ground for payouts you can depend on.

The risks: Prices for these bond proxies often suffer when interest rates move up. Early this year, rising rates drove many preferreds lower–though not drastically. But the Dow Jones utility stock index plunged 17% from mid November 2017 to early February before recovering somewhat. That has driven yields up, with electric utility yields now mostly ranging from 3% to 6%. The dividends of select telecom stocks are essentially safe, but given debt levels and network spending needs, the payout growth rate is low.

How to invest: Exchange-traded funds that own a mix of preferred stocks are an easy way to buy in. Three names worth investigating: iShares U.S. Preferred (PFF, $37, 5.3%), PowerShares Preferred (PGX, $14, 5.7%) and VanEck Vectors Preferred Securities ex-Financials (PFXF, $19, 6.3%). Utilities that should deliver consistent payouts include American Electric Power (AEP, $68, 3.6%) and Southern Co. (SO, $45, 5.1%). AT&T (T, $35) and Kiplinger Dividend 15 member Verizon Communications (VZ, $48) yield 5.8% and 4.9%, respectively. For the past 10 years, AT&T has raised its quarterly dividend by 1 cent every year, to the current rate of 50 cents per share. Verizon's payout has risen by 1.25 cents a year for the past few years, to 59 cents per share per quarter.