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Best Income Stocks for Passive Income

Updated: Nov. 1, 2021, 4:56 p.m.

While younger investors with many years until retirement often prioritize building wealth by investing in growth stocks, investors near or in retirement more often seek to generate passive income from their stock holdings, in order to pay for some of their living expenses.

Investors buy income stocks also because they’re less volatile than growth stocks, making them a good addition to any portfolio. Here we name some of the best income stocks to buy, and help you understand how to create passive income via your investing strategy.

What are income stocks? 

An income stock is one that reliably pays a dividend, which is a portion of the company's profits, to its shareholders. Dividend payments are disbursements, typically in cash, that companies regularly send to their investors. Most companies pay quarterly dividends, though some provide income only annually or semi-annually. A minority of companies pay dividends each month.

Unlike growth stocks, which investors buy primarily because they expect the stocks' prices to increase, income stocks are attractive to investors who want to earn passive income in cash. You can calculate a stock's dividend yield by dividing its total annual dividend payments by its stock price. If a stock that pays a quarterly dividend of $0.25, equal to $1.00 in annual payments, is trading for $20 per share, then its dividend yield is 5%.

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Image source: Getty Images

Best income stocks

The best income stocks have increasing cash payouts over time. A stock with dividend payments that increase by 10% annually doubles its cash payout to shareholders in little more than seven years, while a stock for which the dividend rises by 15% annually doubles the cash payout in just five years.

Dividend growth tends to drive a stock's price higher, as 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.

These are some of the best income stocks available in the market today:

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 forms a robust economic moat around its business, as 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, and the company passes on much of its free cash flow to investors via dividends and share repurchases, which boost the share price. Its steadily growing dividend equates to a dividend yield of just under 2% at the time of writing.

Waste Management has increased its dividend payout for 18 consecutive years. 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 the telecommunications titan Verizon Communications (NYSE:VZ) provide a reliable base of revenue and cash flow. Verizon generated a staggering $23.6 billion of free cash flow in 2020, which enabled the company last year to reward its shareholders with more than $10 billion in dividends.

Verizon's shares currently yield a hefty dividend of more than 4.5% of the company's share price. The telecom giant has increased its dividend for 14 straight years, meaning that Verizon's investors can expect their cash payouts to keep growing steadily over time.

3. Microsoft

Microsoft (NASDAQ:MSFT), the technology industry leader, reliably generates revenue in several ways, which is a boon for its income investors. Its Windows computer operating system continues to produce sizable profits, and 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 growing rapidly. Along with its popular gaming platform Xbox, the company's income will likely continue to grow in the coming years.

Microsoft's current dividend yield, while somewhat modest at roughly 1%, is increasing quickly. The company boosted its dividend by 11% in 2020, the 18th consecutive year that it's raised its payout. That growth makes Microsoft a great option for those seeking an income stock with dividend yield growth potential.

How to create an income investing strategy

One way to earn significant investment income is to build a portfolio of stocks based on their abilities to earn dividend income. In addition to buying income stocks, you can purchase shares in mutual funds and exchange-traded funds (ETF) 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 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 your cash needs are met.

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