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Best Income Stocks for Passive Income

By Matthew DiLallo – Updated Jun 21, 2022 at 6:16PM

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? 

There are many types of stocks. An income stock is one that pays a relatively reliable dividend, which is a portion of the company's profits, to its shareholders. Dividend payments are disbursements, typically in cash, 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 their prices to increase, income stocks are attractive to investors who want to earn passive income in cash. Investors earn a dividend yield, which is the total annual dividend payments divided by its stock price. If a stock that pays a quarterly dividend of $0.25 a share, equal to $1.00 in annual payments, is trading for $20 per share, then its dividend yield is 5%.

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Best income stocks

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

Waste Management (NYSE:WM) excels at turning trash into cash for its investors. The aptly named 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.

Waste Management's profits are well-protected. Meanwhile, the company passes on much of its free cash flow to investors via dividends and share repurchases, which boost the share price.

Waste Management delivered its 19th consecutive annual dividend increase in late 2021. Investors who buy shares today can expect many more dividend increases in the years ahead, which makes Waste Management ideal as an income stock.

2. Verizon

Wireless subscribers of telecommunications titan Verizon Communications (NYSE:VZ) provide a reliable base of revenue and cash flow. Verizon generated an impressive $17.3 billion of free cash flow through the first nine months of 2021. That gave it the funds to reward its shareholders with nearly $8 billion in dividends.

Verizon's shares offered a hefty dividend yield of more than 4.5% of the company's share price in early 2022. The telecom giant has also increased its dividend for 15 straight years. That attractive and growing income stream makes Verizon stock a great one for earning passive income.

3. Microsoft

Technology industry leader Microsoft (NASDAQ:MSFT) 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 gaming platform Xbox, and the company's income will likely continue to grow in the coming years. In 2022, Microsoft agreed to buy gamemaker Activision Blizzard (NASDAQ:ATVI) to bolster its gaming platform.

Microsoft's current dividend yield, while somewhat modest at roughly 1%, is increasing quickly. The company boosted its dividend by 11% in 2021, the 19th consecutive year it has raised its payout. That track record makes Microsoft a great option for those seeking an income stock with dividend growth potential.

4. Realty Income

Realty Income (NYSE:O) has been a dependable income stock over the years. The real estate investment trust (REIT) has increased its dividend more than 110 times since its initial public offering (IPO) in 1994. Overall, it has delivered more than 25 years of dividend growth, putting it in the elite category of a Dividend Aristocrat.

The REIT focuses on buying essential retail properties (think home improvement, grocery, and convenience stores) and industrial real estate. It triple net leases these free-standing properties to high-quality tenants, making them responsible for building insurance, maintenance, and real estate taxes. That provides Realty Income with very stable rental income to continue increasing its dividend.

5. NextEra Energy

NextEra Energy (NYSE:NEE) 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 9.6% 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.

How to create an income investing strategy

One way to earn significant investment income is to build a portfolio of stocks based on their ability to earn 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. This 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 Activision Blizzard, Microsoft, and NextEra Energy. The Motley Fool recommends Verizon Communications and Waste Management. The Motley Fool has a disclosure policy.

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