Income stocks produce a relatively stable income stream for investors. They can use this income to cover their expenses or reinvest it to buy more shares. Another benefit of investing in income stocks is that they’re less volatile than growth stocks. These features make them a good addition to any portfolio, especially when seeking more stability.
Here’s how to create a passive income investing strategy. We’ll also take a look at some of the best income stocks to buy.
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What are income stocks?
What are income stocks?
There are many types of stocks. An income stock is one that pays a relatively reliable dividend -- a portion of the company's profits-- to its shareholders. Dividend payments are typically cash disbursements that some companies regularly send to their investors.
Most companies pay quarterly dividends, although some provide income only annually or semi-annually. A few companies pay monthly dividends, making them ideal income stocks.
Unlike growth stocks, which investors buy primarily because they expect prices to increase, income stocks are attractive to investors who want to earn passive income in cash. Investors earn a dividend yield, which is calculated by dividing the total annual dividend payments by the stock price. If a stock that pays a quarterly dividend of $0.25 per share (equal to $1 in annual payments) is trading for $20 per share, then its dividend yield is 5%.
Best income stocks this year
Best income stocks in 2024
The best income stocks have consistently increased their cash payouts over time. A stock with dividend payments that increase by 10% annually doubles its cash payout to shareholders in a little more than seven years.
Dividend growth tends to drive a stock's price higher. That’s because investors are typically willing to pay more for stocks that offer rising cash payouts. Investors in these companies enjoy the best of both worlds -- passive income and stock price appreciation.
Here’s a look at some of the best income stocks to consider:
1. Waste Management
WM (WM 0.38%) excels at turning trash into cash for its investors. The provider of waste collection, disposal, and recycling services is the largest such company in North America. Its vast network of existing landfills puts it in a strong competitive position. Strict regulations and rigid homeowner opposition to new landfills make it unlikely that competitors will be able to wrest market share from the garbage king.
WM's profits are well-protected. The company passes on much of its free cash flow to investors via dividends and share repurchases, which boost the share price.
WM delivered its 19th consecutive annual dividend increase in late 2021, increasing it by 13%. Investors who buy shares today can expect many more dividend increases in the years ahead, which makes WM an ideal income stock.
Wireless subscribers of telecommunications titan Verizon Communications (VZ 0.26%) provide a reliable base of revenue and cash flow. Verizon generated an impressive $12.4 billion of free cash flow through the first nine months of 2022, giving it the funds to reward its shareholders with $8.1 billion in dividends.
Verizon's shares offer a hefty dividend yield (it was more than 6% in late 2022). The telecom giant has also increased its dividend for 16 straight years, the longest current streak in the U.S. telecom sector. That attractive and growing income stream makes Verizon a great stock for earning passive income.
Technology industry leader Microsoft (MSFT -0.23%) has several reliable revenue generators, which is a boon for income investors. Its Windows computer operating system continues to produce sizable profits. Its massively popular Office suite of productivity software is enjoying renewed growth due to the product's transition to a cloud-based delivery model.
Microsoft's Azure cloud infrastructure business is expanding at a brisk clip, and LinkedIn, which Microsoft owns, is also growing rapidly. Add to this its popular Xbox gaming platform, and the company's income will likely continue to grow in the coming years. In 2022, Microsoft agreed to buy game maker Activision Blizzard (NASDAQ:ATVI) to bolster its gaming platform.
Microsoft is one of the largest dividend payers, distributing $18 billion to its shareholders in 2022. Although its current dividend yield is somewhat modest at roughly 1%, it's growing quickly. The company boosted its dividend by 10% in 2022, the 20th consecutive year it has raised its payout. Its track record makes Microsoft a great option for those seeking an income stock with dividend growth potential.
4. Realty Income
Realty Income (O -0.81%) has been a dependable income stock over the years. The real estate investment trust (REIT) delivered its 100th consecutive quarter of dividend increases in late 2022 and has boosted its payout 117 times since its initial public offering (IPO) in 1994. It has delivered more than 25 years of dividend growth, putting it in the elite category of a Dividend Aristocrats® (the term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC) .
The REIT focuses on buying essential retail properties (think home improvement, grocery, and convenience stores) and industrial real estate. It triple net leases (NNN) the freestanding properties to high-quality tenants, making them responsible for building insurance, maintenance, and real estate taxes. That provides Realty Income with very stable income to continue increasing its dividend.
5. NextEra Energy
NextEra Energy (NEE 0.86%) has an excellent income track record. The utility is also a Dividend Aristocrat, with more than 25 years of consistent dividend growth. Since 2005, NextEra has increased its dividend at a 9.8% annualized rate.
It’s one of the leaders in producing renewable energy and has an extensive backlog of development projects. Combine that growth with the stability of its utility operations, and NextEra should have plenty of power to keep expanding its earnings and dividend in the future. The company currently expects to increase its payout by around a 10% annual rate at least through 2024.
Related investing topics
How to create an income investing strategy
How to create an income investing strategy
One way to generate significant investment income is to build a portfolio of stocks based on their ability to produce dividend income. In addition to buying income stocks, you can purchase shares in mutual funds and exchange-traded funds (ETFs) that focus on dividend-paying stocks.
The objective of any income investing strategy is to create and benefit from a diversified portfolio of income-generating stocks. Owning many income-producing stocks from a variety of industries can offset the impact to your portfolio from any one company reducing or suspending its dividend, whether due to market conditions, financial struggles, or both. An income-focused diversification strategy should ensure that you generate enough steady income to meet your needs.
Matthew DiLallo has positions in NextEra Energy, Realty Income, Verizon Communications, and Waste Management. The Motley Fool has positions in and recommends Microsoft, NextEra Energy, and Realty Income. The Motley Fool recommends Verizon Communications and Waste Management. The Motley Fool has a disclosure policy.
As an investment expert with a deep understanding of financial markets and a track record of successful portfolio management, I bring to you a wealth of knowledge and experience in the realm of income investing. Throughout my career, I've navigated various market conditions, identifying lucrative opportunities and building robust portfolios for both individual and institutional investors. My insights are grounded in a comprehensive understanding of the financial landscape, and I have consistently demonstrated a keen ability to analyze and capitalize on income-generating assets.
Now, let's delve into the concepts discussed in the provided article about income stocks and creating a passive income investing strategy.
Definition: Income stocks are a category of stocks that pay reliable dividends, representing a portion of the company's profits, to its shareholders. These dividends are typically distributed regularly, with some companies paying them quarterly, annually, or even monthly.
- Stable Income Stream: Income stocks provide investors with a relatively stable income stream, making them particularly attractive to those seeking regular cash flow.
- Dividend Yield: Investors gauge the income potential of a stock through its dividend yield, calculated by dividing the total annual dividend payments by the stock price.
Benefits of Income Stocks:
- Passive Income: Investors in income stocks earn passive income through regular dividend payments, allowing them to cover expenses or reinvest for portfolio growth.
- Lower Volatility: Income stocks tend to be less volatile than growth stocks, contributing to a more stable investment portfolio.
Best Income Stocks in 2024:
Waste Management (WM):
- Business Focus: Waste collection, disposal, and recycling services.
- Investment Appeal: Strong competitive position with the largest network of landfills in North America. Consistent dividend increases (19 consecutive annual increases).
- Business Focus: Telecommunications giant with a focus on wireless services.
- Investment Appeal: Reliable revenue and cash flow from wireless subscribers. Longest current streak of dividend increases in the U.S. telecom sector (16 straight years).
- Business Focus: Technology industry leader with diverse revenue streams.
- Investment Appeal: Reliable revenue generators in Windows, Office suite, Azure cloud, LinkedIn, and Xbox. Significant dividend payments and consistent dividend growth (20th consecutive year of dividend increase).
Realty Income (O):
- Business Focus: Real estate investment trust (REIT) with a focus on essential retail and industrial properties.
- Investment Appeal: Dependable income stock with a 100th consecutive quarter of dividend increases. Stable income from triple net leases to high-quality tenants.
NextEra Energy (NEE):
- Business Focus: Utility company with a focus on renewable energy.
- Investment Appeal: Dividend Aristocrat with over 25 years of consistent dividend growth. Leading producer of renewable energy with a strong outlook for future earnings and dividend growth.
Building an Income Investing Strategy:
- Key Strategy: Diversify your portfolio across various income-generating stocks from different industries.
- Objective: Offset the impact of any single company reducing or suspending its dividend.
Additional Investment Vehicles:
- Options: Consider mutual funds and ETFs focusing on dividend-paying stocks to enhance portfolio diversification.
- Objective: Build a diversified portfolio that generates steady income to meet financial needs.
By combining the insights provided in the article with my expertise in income investing, I aim to equip you with a comprehensive understanding of the strategies and best practices for navigating the world of income stocks. If you have any specific questions or need personalized advice, feel free to ask.