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.
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
Best income stocks in 2024
The best income stocks offer an above-average dividend yield and have consistently increased their cash payouts over time. For example, 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. Investors are typically willing to pay more for stocks that offer rising cash payouts, so 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. Coca-Cola
Coca-Cola (KO -0.2%) pays a well above-average dividend. The beverage giant's dividend yield was nearly 3% in mid-2024, more than double the S&P 500's dividend yield of less than 1.5%.
Coca-Cola also has a terrific record of increasing its dividend. The company delivered its 62nd consecutive annual dividend increase in early 2024. That kept it in the elite group of Dividend Kings, companies with 50 or more years of consecutive dividend increases.
The beverage behemoth should have no trouble continuing to supply investors with a rising stream of dividend income in the future. The company's long-term goal is to grow its earnings per share at a high single-digit annual rate. With its earnings on the rise and a strong balance sheet, Coca-Cola should have plenty of pop to continue pushing its payout higher.
2. Verizon
Wireless subscribers of telecommunications titan Verizon Communications (VZ -0.05%) provide a reliable base of revenue and cash flow. Verizon generated an impressive $8.5 billion of free cash flow through the first half of 2024, giving it the funds to reward its shareholders with $5.6 billion in dividends.
Verizon's shares offer a hefty dividend yield of more than 6.5% as of mid-2024. The telecom giant has also increased its dividend for 17 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.
3. Johnson & Johnson
Healthcare behemoth Johnson & Johnson (JNJ -1.58%) pays a very healthy dividend. It offered a more than 3% dividend yield in mid-2024. Meanwhile, it has matched Coca-Cola with 62 straight years of dividend increases.
The healthcare company is a financial fortress. It had an elite AAA bond rating (higher than the U.S. government). Johnson & Johnson ended the second quarter of 2024 with $25 billion of cash against $41 billion of debt. Meanwhile, it produced $7.5 billion of free cash flow in the period (more than enough to cover its $3 billion quarterly dividend outlay).
Johnson & Johnson expects to grow its operational sales at a mid-single-digit annual rate through 2030. Meanwhile, its strong balance sheet will give it the flexibility to make acquisitions to further boost its growth. These factors put it in a strong position to continue increasing its dividend.
4. Realty Income
Realty Income (O -1.16%) has been a dependable income stock over the years. The real estate investment trust (REIT) delivered its 107th consecutive quarter of dividend increases in mid-2024 and has boosted its payout 126 times since its initial public offering (IPO) in 1994. It has delivered 30 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), industrial real estate, and other properties. 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.
It steadily buys new income-producing properties, which should allow it to continue increasing its attractive monthly dividend. Realty Income yielded more than 5% in mid-2024.
5. NextEra Energy
NextEra Energy (NEE -1.01%) has an excellent income track record. The utility is also a Dividend Aristocrat, with 30 years of consistent dividend growth. Since 2003, NextEra has increased its dividend at a 10% 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 expects to increase its payout (which yielded over 2.5% in mid-2024) by around a 10% annual rate at least through 2026.
Related investing topics
How to create a 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 on 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.
