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3 Great Income Stocks to Buy Right Now

By David Jagielski - Mar 19, 2021 at 7:03AM

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One is almost a Dividend King, while another pays nearly 5% a year in dividends.

An easy way to grow your portfolio's value is by investing in stocks that generate recurring cash flow. Slowly but steadily, you can see your investments rise in value without taking on much risk. Companies that pay dividends need cash flow to be strong, and so that means their businesses are (in many cases) in fairly good shape.

And you don't need to settle for a low payout like the 1.5% that the typical stock on the S&P 500 averages right now. Three stocks with better yields that are some of the better income-generating investments you can add to your portfolio today include Bristol Myers Squibb (BMY 0.45%), PepsiCo (PEP 0.68%), and Verizon Communications (VZ -0.49%).

Wallet full of cash.

Image source: Getty Images.

1. Bristol Myers Squibb

At 3.2%, drug manufacturer Bristol Myers Squibb pays investors an above-average yield that looks great in conjunction with the stock's 24% rise in value over the past 12 months. Although that is below the S&P 500's gains of 65%, the company is coming off a bit of a challenging and busy year.

In late 2019, it completed its mammoth $74 billion acquisition of Celgene, and in October 2020 it announced it would be spending another $13.1 billion to buy MyoKardia. While the acquisitions will help the company grow in the long term, in the short term there will be growing pains.

As a result of the acquisition involving MyoKardia, Bristol Myers incurred an $11.4 billion charge relating to in-process research and development. For investors who may be alarmed about the company's $9 billion net loss for the past year, that is largely related to a one-time expense, in addition to other costs related to integrating the new businesses. 

What matters most for cash dividends is how much money the company is bringing in. In 2020, it accumulated $14.1 billion in cash from its day-to-day operations. Although acquisitions took the bulk of that cash this past year ($13.1 billion), that would normally be sufficient to cover its dividend payments, which totaled $4.1 billion in 2020.

And with Bristol Myers expecting to generate annual cost synergies of $2.5 billion by 2022 as a result of its deal with Celgene, a stronger bottom line will help bring in more cash for the business.

Dividend investors may worry that acquisitions will hamper the company's payouts, but Bristol Myers has increased its dividend payments in recent years even amid its quest for more growth and expanding its portfolio of products. Its quarterly payments of $0.49 today are 29% higher than the $0.38 that the company was paying five years ago, increasing at a compounded annual growth rate (CAGR) of 5.2%.

With the business getting bigger and hopefully less noise on its financials this year, this is a great healthcare stock to buy that may generate some stronger returns in 2021 to go along with its solid yield.

2. PepsiCo

If you are investing based on the hope that there is a strong economic recovery that happens later this year, PepsiCo is a great option and doubles as a solid income investment. Its 3.2% yield is in line with Bristol Myers' payout, and it too can generate lots of cash for your portfolio. In the past year, its shares have underperformed the markets by a wide margin, rising by just 5%. 

However, that's precisely why now could be a great time to buy this stock, before it takes off as the economy opens up and demand for its products grows. In 2020, its net revenue of $70.4 billion rose by 4.8%, but the company's bottom line of $7.1 billion was 2.7% lower than the previous year's tally as PepsiCo blamed COVID-19 for saddling it with more costs.

But despite the adversity, the company announced it would still be hiking its dividend by 5% this year, the 49th year in a row that it is raising its payouts -- putting it one more annual increase away from becoming a Dividend King.

Its current payout ratio sits at 77%, which is manageable. And in 2020, its free cash flow of $6.4 billion was enough to support the $5.5 billion it paid out in dividends. With a stronger outlook for 2021, the company will likely have more of a buffer in the near future. This year, PepsiCo anticipates mid-single-digit organic revenue growth and that its core constant currency earnings per share will rise in the high single-digits.

3. Verizon

Telecom giant Verizon pays the highest yield on this list, at 4.5%. But with returns of just 3% over the past year, this has also been the worst-performing stock on this list. In 2020, the company had a tough year as sales of $128.3 billion declined by 2.7%. However, Verizon isn't a stock that would normally be a target of growth investors; in 2019 its sales were flat, and the year before that they were up by a relatively modest 3.8%.

Verizon is a great income investment because of its stability, and while it may have a better year in 2021 as people potentially travel more and spend money on roaming, investors shouldn't expect a whole lot of fluctuation on the top line. What you will like, however, is that Verizon typically generates profit margins of at least 10%.

Its payout ratio of 57% leaves decent room for the company to continue making dividend payments, and its free cash flow of $21.5 billion this past year was a 26.9% increase from last year, easily accommodating its cash payouts of $10.2 billion. Like the other two stocks on this list, Verizon has also bumped up its payouts over the years. Today, its $0.6275 quarterly dividend payment is 11.1% higher than the $0.565 it was paying in 2016, increasing by a CAGR of 2.1% over that time.

With a relatively stable business and some dividend growth to look forward to, Verizon is an income stock you can safely buy and hold for many years.

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Stocks Mentioned

Bristol Myers Squibb Company Stock Quote
Bristol Myers Squibb Company
BMY
$77.59 (0.45%) $0.35
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$50.99 (-0.49%) $0.25
Pepsico, Inc. Stock Quote
Pepsico, Inc.
PEP
$170.11 (0.68%) $1.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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