Here are my top 5 dividend stocks to buy in August

After spectacular results in 2023 and a great start to 2024, sentiment on the capital markets has recently started to calm down.

Of course, the recent selling activity can be attributed to a variety of factors, including mixed employment data, the Federal Reserve’s monetary policy outlook, and of course the upcoming presidential election. In times like these, investors may decide to pull back from more growth-oriented opportunities and seek out safer, more stable positions.

Let’s take a look at five dividend stocks that I think look like flashy buys right now. Investors looking for reliable passive income won’t want to miss out on these stocks.

1. Hercules’ Capital

Hercules’ Capital (HTGC -0.06%) is a business development company (BDC) that specializes in high-yield loans to venture-backed companies. BDCs are required to pay out at least 90% of their taxable income each year in dividends, so they can be lucrative sources of passive income.

Generally speaking, a bank may shy away from lending to a young company. And if they do, it probably won’t be a significant enough amount to provide an adequate runway.

Hercules differentiates itself from banks in the way it structures deals. For example, while a bank might have a dollar threshold, Hercules typically offers larger term loan sizes, but at higher interest rates. In addition, Hercules typically includes warrants in its deals, which act as an incentive if a portfolio company is acquired or goes public.

A good measure of a BDC’s health is to look at its non-accrual investments. These are essentially investments that the company considers unlikely to return principal and interest.

In the quarter ended June 30, only 2.5% of Hercules’ $3.6 billion portfolio was classified as non-accrual.

Hercules currently trades at a price-to-book (P/B) ratio of 1.6, which is close to a 10-year high. Its total return over the past decade has been 229%, which is well above S&P 500The total return was 184%. So even if Hercules shares are not cheap, I think the premium is deserved.

HTGC Price to Book Value Data by YCharts

Considering that the company’s shares offer a dividend yield of 10.4%, I think it’s a good time to invest in Hercules and prepare for long-term holding.

2. Ares Capital

The next BDC on my list is Ares Capital (ARCC -0.19%). Ares differs from Hercules, however, because the company has a broader industry reach and offers more advanced financial products.

Moreover, with 50% of the company’s total portfolio allocated to top-priority secured loans, investors can rest assured that Ares is well-prepared even in adverse scenarios.

ARES Total Return Data by YCharts

According to the chart above, investors can see that Ares has clearly outperformed the S&P 500 as well as leading BDC-focused ETFs over the past few years. Considering how strong the S&P 500 has been since the massive sell-off in 2022, it’s impressive how much Ares has outperformed its peers and the broader market.

While it may not be as attractive as high-growth AI stocks, Ares has quietly been a multibagger for its shareholders. Investors may want to consider boosting their returns with this passive income player, as the stock currently yields around 9.3%.

3.AT&T

I will admit right away that the telecommunications industry is not very exciting and AT&T (T -0.15%) is no exception. The telecommunications industry is quite uniform, which essentially forces the big players to compete on price.

Revenue Data (Quarterly) by YCharts

When you’re in the business of offering the cheapest solution, it’s hard to grow. As the chart above shows, AT&T’s revenue has fallen significantly over the past decade. Again, a crowded market combined with the ongoing attrition dynamics plaguing the communications sector isn’t exactly a recipe for hypergrowth.

However, AT&T has demonstrated a disciplined approach to costs during this period of declining sales. Because of this, the company has actually been able to increase its free cash flow despite some sharp ebbs and flows on the top line.

It is worth noting that some of this cash flow was boosted by AT&T cutting its dividend by almost half in 2022. While this is not very encouraging, I have to admit that AT&T’s management deserves credit.

AT&T had net debt of $127 billion at the end of the second quarter. That’s an improvement of about $5 billion compared to the second quarter of 2023. If AT&T continues to focus on strengthening its balance sheet, I don’t see any reason for the company to cut its dividend again.

So while AT&T won’t be a huge boost to your portfolio, I think the stock offers a compelling opportunity to turn things around. What’s more, AT&T’s current price-to-earnings (P/E) ratio of 11.1 is hovering near all-time lows. While some may have been turned off by AT&T for good, I think now is a good time to buy the stock at a very low price and take advantage of the 5.7% yield.

4.Verizon

Next on my list is one of AT&T’s biggest competitors, Verizon Communications (WZ) -0.44%)The main part of my thesis for investing in Verizon is illustrated in the graphic below.

Last September, Verizon recorded 17 consecutive years of dividend increases. Further speaking about the commitment to more dividend increases, Verizon CEO Hans Vestberg said he wanted to “continue to put the board in a position to do that” during the company’s second-quarter earnings call.

To me, Verizon isn’t just a sure-fire dividend opportunity; I think a hike could be on the horizon next month. That could provide a small jolt to the stock, so I’d be a buyer now. Verizon’s P/E of just 15.2 pales in comparison to the S&P 500’s P/E of 27.5. With the stock yielding about 6.5%, it looks like a great opportunity to invest at a big discount to the broader market right now.

5. Altria

In my opinion, I left the best for last. Altria (MO 0.04%) is the tobacco company behind well-known cigarette brands like Marlboro and Black & Mild, and is also known as the Dividend King. The tobacco industry is undoubtedly in an existential crisis. An increasing number of consumers are paying more attention to their health and well-being, making tobacco products a tough sell.

But like all great companies, Altria has found ways to overcome this challenge. Management has said the next phase of Altria is to “move beyond burning.”

Namely, the company is focusing more attention on vaping products, as well as oral nicotine pods, as opposed to traditional smoking products. While this shift is in its early stages, there are strong indications that this change is working.

Last June, Altria acquired electronic cigarette maker NJOY. At the time, NJOY products were available in about 35,000 stores nationwide. According to Altria’s second-quarter earnings presentation, NJOY’s reach nearly tripled to 100,000 stores.

While the aggressive expansion efforts may suggest that NJOY is in high demand, the brand currently commands only about 5% of U.S. retail sales. In my opinion, this bodes well for NJOY’s long-term momentum and validates Altria’s investment and focus on smokeless tobacco.

Another reason I love Altria stock is that the company has been actively buying back stock for some time now. In the first six months of 2024, Altria bought back $2.4 billion worth of shares at an average price of $44.50.

Companies may decide to buy back shares when management believes the stock is undervalued. Considering that Altria currently trades at around $51 per share, the company’s share buyback program looks pretty reasonable right now.

Given its history of consistently increasing its dividend, as well as its exciting new chapter in the next phase of the tobacco industry, I see Altria as a great opportunity for investors looking for a combination of earnings and some passive income.