Passive income is supposed to ease your workload, not add to it. That's why investors who are seeking a worry-free retirement should find dividend-paying stocks that don't require close monitoring. The best way to determine that a dividend does not need extra attention is to make sure it meets the following three criteria:
- Relatively stable revenue backed by fee-based contracts or other recurring sources of income.
- A strong balance sheet that is either cash-rich or backed by an investment-grade credit rating and low leverage metrics.
- Ample excess cash flow to provide a cushion.
Three of my favorite passive income stocks pass this test with ease.
The real estate giant
With a global property portfolio that spans several property classes, investing in Brookfield Property Partners (NASDAQ:BPY) would make any investor an instant real estate mogul. At its core, the company owns 153 premier office properties as well as 128 best-in-class malls. In addition to that, the company invested in funds that own stakes in 39,500 multifamily units, 54 million square feet of industrial space, 27 hospitality properties, 90 self-storage facilities, and the real estate leased to 300 automotive dealerships.
Aside from having a vast real estate portfolio, Brookfield Property Partners meets all three of the criteria:
- Stable revenue: 92% of its core office portfolio is leased to an average term of 8.4 years while its retail portfolio is 95.2% leased.
- Strong balance sheet: Investment grade credit rating, a debt-to-capital ratio below 50%, and asset-level, non-recourse debt.
- Ample excess cash: Targeted payout ratio is 80% of funds from operations.
Because of this, Brookfield Property Partners' current yield of 4.8% is very secure. In fact, the company believes that the embedded growth within its portfolio will generate 5% to 8% distribution growth over the long term.
The energy midstream titan
Enterprise Products Partners (NYSE:EPD) is one of the largest integrated midstream companies in the U.S. The company controls 49,000 miles of energy pipelines, which is enough to circle the globe twice. In addition to that, it owns 250 million barrels of liquids storage capacity, 14 billion cubic feet of natural gas storage capacity, 47 processing plants, and substantial import/export capacity along the Gulf Coast.
Enterprise Products Partners uses those energy infrastructure assets to produce gobs of cash to fund a very lucrative distribution, which currently yields 5.5%. That payout is rock solid:
- Stable revenue: 85% of its operating margin backed by fee-based assets.
- Strong balance sheet: One of the highest credit ratings among MLPs (Baa1/BBB+) and a debt-to-adjusted-EBITDA ratio that has averaged 3.9 times since 2009.
- Ample excess cash: Enterprise's distribution coverage ratio has averaged 1.4 times since 2011, enabling it to retain $5.1 billion of cash to invest in growth projects.
Enterprise's combination of stable revenue and fiscal conservatism is paying off, evidenced by its ability to increase its payout for 48 consecutive quarters. It has already promised two more increases this year, and with $6.5 billion in growth projects in the pipeline, the company has clear visibility to continue boosting the payout through 2018.
The wireless behemoth
Verizon Communications (NYSE:VZ) has the largest wireless subscriber base in the country at 112.6 million. On top of that, the company has 7.1 million FiOS Internet subscribers and 5.9 million FiOS TV subscribers. Last year this large customer base enabled Version to generate $131.6 billion in revenue. Of that amount, the company returned $8.5 billion in cash back to investors via dividends, which at the current rate and stock price leads to a yield of 4%.
Verizon's payout is as steady as they come:
- Stable revenue: Strong recurring revenue via monthly customer payments, with wireless customer churn of less than 1% last year.
- Strong balance sheet: Investment-grade rated (Baa/BBB+/A-) with a stable outlook. Net debt to EBITDA of 2.2 times at the end of last quarter, which is down from 2.3 times at the end of last year.
- Ample excess cash: Last quarter Verizon generated $4 billion in free cash flow and paid $2.3 billion in dividends.
As these metrics make clear, Verizon has the right combination to deliver steady income to investors for years to come.
Investors who want truly passive income need to focus on companies built on a strong financial foundation. These pillars of strength put a company's dividend in the position to withstand the headwinds that are sure to occur. It also allows an investor to sit back and relax knowing their dividend income is safe for the long haul.
Matt DiLallo owns shares of Brookfield Property Partners, Enterprise Products Partners, and Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.