3 Top Dividend Stocks for Generating Passive Income

You can work for money. But you can also have your money work for you. One great way to make passive income is to invest in dividend stocks.

We asked three Motley Fool contributors to identify top dividend stocks for generating passive income. Here's why they selected AbbVie (ABBV -1.03%), Gilead Sciences (GILD 0.07%), and Merck (MRK 0.10%).

Let this Dividend King serve you

Keith Speights (AbbVie): Only the most elite dividend stocks become Dividend Kings. AbbVie ranks as a member of this exclusive club with 50 consecutive years of dividend increases.

Stocks belonging to dividend royalty don't always pay the most attractive dividend yields. However, AbbVie is an exception. Its dividend yield currently tops 3.7%. 

Even better, the company has delivered solid gains for shareholders. In 2021, the stock soared 26%. So far this year, AbbVie is trouncing the market with its shares up around 12%.

As icing on the cake, the stock is also a bargain. Its shares trade at a little over 10 times expected earnings. 

Sure, AbbVie faces some challenges in the near future. Humira, the company's top-selling drug, loses U.S. patent exclusivity in 2023. This will make a big dent in AbbVie's revenue: Humira contributed around 37% of total sales last year.

The good news is that AbbVie expects to quickly return to growth. It already has two newer successors to Humira with Rinvoq and Skyrizi. AbbVie's acquisition of Allergan in 2020 also added several growth drivers to its lineup, notably including the Botox franchise and antipsychotic drug Vraylar. 

Few stocks offer the combination of dividends, growth, and value that AbbVie does. The stock appears to be a great candidate for investors seeking to generate passive income.

A safe and growing dividend

David Jagielski (Gilead Sciences): If you're an income investor, you often have to choose between whether you want a safe dividend, a high payout, or a growing yield. That's not the case with Gilead Sciences. The big biotech, which generates the bulk of its revenue through HIV treatments, just might be the ideal passive income investment to own right now.

Due to the bear market, Gilead stock is down around 15% this year. However, it's still outperforming the overall market. As a result of Gilead's decline, though, its dividend yield has risen to nearly 4.7%.

Gilead's payout ratio is a bit high at around 80%. But on a cash flow basis, the dividend is sound. During the first three months of the year, it generated $1.6 billion in free cash flow. It spent $945 million on dividend payments and still had sufficient room to buy back $352 million in common stock. The company has also been consistently increasing its dividend payments since 2016, with its most recent hike a year-over-year increase of 2.8%.

Gilead has posted a profit in each of the past five years, performing well even during the pandemic. Although total revenue rose just 3% in the first quarter of 2022 to $6.6 billion, the company's oncology sales increased by 60% year over year while top-selling HIV drug Biktarvy delivered 18% growth.

Don't look for jaw-dropping growth from Gilead in the near future. However, it just might be one of the safest dividend stocks around.

A solid dividend pick at a reasonable price 

Prosper Junior Bakiny (Merck): The stock market still faces heightened volatility and geopolitical issues. Things could get worse if, as some analysts have predicted, an economic recession is on its way. In this environment, strong dividend-paying stocks can help investors smooth out market losses and generate some much-needed income on the side. But why pick a pharmaceutical giant like Merck? 

For one, the company's business is solid. Merck develops pharmaceutical products for humans and animals and is a leader in both fields. Its lineup most notably features Keytruda, a cancer drug that continues to earn new indications even after notching more than two dozen regulatory wins. Other key products for the company include HPV vaccines Gardasil and Gardasil 9. 

Merck boasts 29 programs in its late-stage pipeline alone. Assuming a modest 25% success rate, the company should be able to earn at least seven regulatory approvals from its current late-stage pipeline. Of course, the company has many more programs in phase 1 and phase 2 clinical trials. Merck's ability to get new products on the markets (and earn label expansions for existing drugs) is a key reason it can continue to perform well.

Further, most patients will keep taking lifesaving drugs even during tough economic times. These factors make Merck an excellent stock to consider buying in the current environment.

For those willing to hold onto the company's shares, their patience will pay dividends -- literally. Merck currently offers a yield of around 3% -- much higher than the S&P 500's average of 1.38%. With a payout ratio of close to 50%, Merck still has plenty of room for dividend increases.

Lastly, the company's current forward price-to-earnings is 12, compared to the industry's average of 13.5. At the current valuation, this fast-growing dividend stock appears to be a smart pick.