Forget Rental Properties: Invest $10,000 in These High-Yield Dividend-Growing Stocks for Passive Income

Passive income is a popular concept these days. Defined as money earned outside of a traditional job and requiring minimal time or effort, it’s a tempting proposition for investors tired of the rat race.

Many people will present buying rental properties as the best form of passive income. But I think this is a misnomer. Managing a rental property can be profitable, but it takes a lot of time and effort to maintain. This is not “passive” income in the traditional sense.

The purest form of passive income comes from buying high dividend yielding stocks because they require zero maintenance to keep your cash flowing. Here are two very high dividend stocks to buy $10,000 above any rental property for your investment portfolio right now.

Inherited tobacco pricing power

Many investors are wary of investing in tobacco companies. There is a perception that the sector is in terminal decline, with fewer and fewer cigarette users worldwide. While it’s true that tobacco use is declining, there’s still plenty of profit to be made for legacy brands like Marlboro, owned by Altria Group (MO 0.32%). With so much skepticism directed at the industry, you can buy the stock at a cheap earnings multiple today. It currently has a price-to-earnings (P/E) ratio of 8.7.

Today, Altria Group has a dividend yield of 7.83%. If you invest $10,000 in Altria stock, the company will pay you $783 in dividends each year. Over the past 10 years, Altria has consistently increased its dividend per share to shareholders, and payouts have grown 100% over those 10 years.

Fueling this dividend growth is the pricing power of its tobacco brands such as Marlboro. Even as cigarette consumption — particularly in the United States — is declining, Altria has the pricing power to counter volume declines and boost cash flow (the lifeblood of dividend payments). Free cash flow per share has grown 125.8% over the past 10 years, despite massive declines in US cigarette consumption.

Cigarettes may not be around forever. But they will still generate healthy cash flows for many years. This makes Altria Group an easy dividend income stock that will likely generate a ton of passive income and help you grow your wealth without lifting a finger.

MO PE report data by YCharts

International exposure and new-age products

Perhaps a more promising tobacco company is British American Tobacco (BTI -0.35%). It owns legacy cigarette brands like Newport and has a higher dividend yield than Altria Group at 8.21%. This equates to $821 in annual passive income on a $10,000 investment.

Even better, British American Tobacco has had much more success with new-age nicotine products that are stealing market share from cigarettes. These include vaping e-cigarettes and nicotine pouches. This combined segment reached profitability for the company in 2023 and will significantly contribute to earnings and cash flow growth in the coming years.

Despite seeing headwinds from foreign currency depreciation, British American Tobacco has grown its free cash flow per share by 35% since 2019. During this period, new-age products have been a headwind to profitability, as the company expanded its operations. Over the next five years, these are poised to be a tailwind for earnings growth.

As with Altria Group, British American Tobacco has plenty of room to continue growing its free cash flow per share over the next 10 years. With a sky-high dividend yield of over 8%, British American Tobacco is a great stock to own to add passive income to your portfolio.

Both stocks have significantly higher dividend yields than S&P 500 index, which is yielding a paltry 1.32% today. With the Federal Reserve lowering interest rates, it will be harder to earn a high interest rate with a savings account or Treasury bond. For those prioritizing passive income, British American Tobacco and Altria Group look like attractive assets to hold in the portfolio right now.