Both stocks have substantial dividend yields. This is something that I think is important when it comes to investing to generate dividend income.

There’s a lot to be said for companies that are growing their dividend payouts. But I think that an effective passive income stock needs a high yield to start with.

The S&P 500 currently has a dividend yield of 1.7%. If I invest £1,000 today and the dividend grows at 10% per year, I’ll receive £315 in dividend income over the next decade.

Alternatively, I could invest the same £1,000 in a stock that currently yields 3% that only grows its dividends at 1% per year. In that case, I’ll receive £405 over 10 years.

To me, this shows that stocks with high dividend yields have a big advantage over stocks that are growing quickly. Here are my two top stocks to buy with dividends yielding more than 3%.

Rio Tinto

Rio Tinto (LSE:RIO) currently has a dividend yield of around 9.5%. This won’t last, though – the company has already announced that next year’s dividend will be lower.

Even if the dividend gets cut in half, though, that still leaves a dividend with a yield above 4%. And there’s plenty more that I like about the stock as a passive income vehicle.

As a mining company, the profitability of the underlying business is tied to the price of the commodities it extracts. In turn, its dividends are determined by its profitability.

Each year, the company pays a basic dividend and an additional special dividend. The basic distribution has increased consistently enough to make the stock a dividend aristocrat.

I expect Rio Tinto’s basic dividend to increase consistently. And that’s enough to make it interesting to me as a dividend stock to buy today.

Moreover, I think that the company’s special dividends will be strong. While commodities prices might fluctuate, I expect Rio Tinto’s copper operations to trend higher over time.

Kellogg

In many ways, Kellogg (NYSE:K) is the opposite of Rio Tinto. The stock currently has a dividend yield of 3.1%.

The company has three main business arms. The first is snacks, the second is cereals, and the third is plant-based foods.

In general, I expect demand for Kellogg’s products to remain stable over time. Management continues to invest in its brands and I think that this will result in steady sales and profits.

The organisation is currently restructuring. It’s in the process of separating its three divisions into individual businesses.

I expect the dividend payments to persist, though. While each business can set its own dividend policy, I think that the overall payout should remain solid.

As a result, I’d be pleased to buy Kellogg shares at their current prices. My intention is to collect dividends and reinvest them which I think should be a successful strategy over time.

Things people use

Unilever is one of the 10 companies that control everything that we buy. These companies make things like food, cleaning products, and toiletries.

An increased cost of living might force consumers to spend less on things that they can do without. But while this might be bad news for companies that sell holidays and cars, it’s less likely that we’ll make significant cutbacks in things like food and toothpaste.

In order to see why I think the Unilever share price might be attractive with a recession on the horizon, let’s compare it to two of the other companies that control everything that we buy: Kellogg (NYSE:K) and The Kraft-Heinz Company (NYSE:KHC).

Brand power

Each of these companies draws strength from its portfolio of well-known brands. Strong brands allow businesses to charge a premium for their products. That should result in higher operating margins. So in order to evaluate brand strength, let’s see how Unilever’s operating margin have compared with operating margins at Kellogg and Kraft-Heinz over the last four years.

As we can see, Unilever’s operating margin is consistently the highest of the group. That indicates to me that it’s able to charge a premium price for its products.

Debt

Unilever, Kellogg, and Kraft-Heinz all carry significant amounts of debt. Paying interest on debt can obstruct a company’s ability to make money for its shareholders. We can assess Unilever relative to its rivals here by comparing each companies interest expense — the amount of interest the company pays on its debt — with the company’s operating income. The results are as follows:

Of the three, Unilever pays the smallest amount of its operating income out as interest on its debt. This is a good thing. It should give the company greater financial flexibility and give it better opportunities to adapt its business in the future.

Conclusion

Unilever seems to be able to use its strong brand portfolio more effectively than its rivals and it also has the interest payments on its debt well under control. Investing in Unilever comes with risk as the company attempts to restructure its product lineup in pursuit of growth. And I wouldn’t expect Unilever shares to be entirely immune from a general movement downwards in the stock market. But if I were looking to buy shares in a consumer products company to protect myself from an upcoming recession, I’d be looking at the Unilever share price as a buying opportunity today.

Kellogg

The first dividend stock that I’m watching in March is Kellogg (NYSE:K). The stock has a dividend yield of around 3.5% at the time of writing, but dividend isn’t just about looking at yields. It’s about looking at the underlying business, and I think the business at Kellogg’s is in decent shape. Rising input costs due to high commodity prices and supply chain shortages are a threat at the moment, but I think that Kellogg can weather the storm and provide a reliable dividend.

Kellogg is best known for its cereal brands, but about half its revenue these days comes from its range of snacks (Pringles being the most prominent). The company has entrenched relationships with retailers, which helps protect its competitive position and its management has been investing in its brands, which I view as wise. I’m very interested in buying this stock, priced at around $60.

British American Tobacco

The second dividend stock on my radar is British American Tobacco (LSE:BATS). The usual view on stocks like this one is that they have attractive economics but a diminishing market. So an investment comes down to whether or not there’s enough left in the market to justify the current price. I agree with half of this. I agree that the economics of smoking are attractive, but I don’t think that the market is diminishing. While it’s true that smoking is less prevalent, the number of people who smoke has increased steadily since 1990. 

The drawback to British American Tobacco is that it generates the majority of its revenue outside the geographic regions where the number of smokers is increasing the fastest. But I think the global growth of smoking goes some way toward explaining the company’s steady revenue growth over the last decade. The company currently pays a dividend with a 6.5% yield and I think it might well continue to do so. 

Polaris

The last stock on my dividend stock list for March is Polaris (NYSE:PII). The company designs and manufacturers off-road vehicles. With a 2.1% yield, this isn’t the most obvious stock to include here. But I think the company’s investment proposition might be attractive to me as an investor seeking passive income going forward.

At the moment, Polaris is battling a collection of headwinds. Supply chain disruption, cost inflation, and a slowing global economic environment are all pushing against the company’s sales. But I think that this is reflected in the stock price and these headwinds won’t last forever. 

The risk for this investment comes from uncertainty around how long these headwinds will persist. I think, however, that the market is currently overreacting to a difficult macroeconomic situation for Polaris, so this might be a good time to pick up shares in a strong company that is a reliable source of passive income.