In this article, we will take a look at some of the best stocks for passive income.
Passive income is money earned with little to no ongoing effort, unlike traditional income that requires active work. Instead of exchanging time for money, passive income allows you to generate earnings while focusing on other aspects of life. One common example is rental properties. After the initial effort of purchasing a property, preparing it for tenants, and finding reliable renters, landlords can collect rent each month without needing to be actively involved in daily management.
With the economic landscape constantly changing, many individuals are looking for ways to achieve financial stability beyond traditional full-time jobs. A 2024 Financial Wellness Survey by First National Bank of Omaha found that 53% of Americans now have at least one passive income source, highlighting a rising trend in diversifying income streams.
Vending machines gained traction as a passive income opportunity during the 2020 pandemic. Between 2019 and 2023, discussions about passive income and vending machines saw a significant rise on social media, with mentions tripling on X and increasing sixfold on Instagram, according to social media management firm Sprinklr. Google searches for passive income also jumped by approximately 75% during this period. While many Americans have found success with this investment, its long-term viability remains uncertain.
Investing in stocks, particularly dividend-paying equities, offers a clear and reliable way to generate passive income. These investments have a proven track record of delivering solid returns over time. The share of personal income derived from dividends has steadily increased, making them an important earnings source. According to S&P Dow Jones Indices, dividend income grew from 2.68% in late 1980 to 7.88% by mid-2024, while interest income declined from 14.58% to 7.61% over the same period. The report also highlighted that since 1936, dividends have accounted for more than one-third of the total returns from the broader market, with capital gains making up the remaining two-thirds.
A study by WisdomTree underscores the potential of dividend-paying stocks to generate substantial income. The report suggests that focusing on dividends can significantly boost an investor’s earnings and improve the trailing 12-month dividend yield. This approach is especially beneficial during periods of low yields and heightened market volatility, where returns may be uncertain. Investing in dividend-weighted indexes can provide a reliable income stream in such conditions.
Both seasoned and everyday investors recognize the importance of incorporating dividend stocks into their portfolios to maintain a steady flow of income. In an interview with CNBC, Brian Bollinger, president of Simply Safe Dividends, emphasized the role of dividends in generating passive income. While many retirees rely on dividends as a key income source, Bollinger pointed out that anyone can build a portfolio centered on dividend-paying stocks. He also stressed the value of developing income streams that are independent of traditional employment wages. In view of this, we will take a look at some of the best stocks to buy for passive income.
Photo by Dan Dennis on Unsplash
Our Methodology:
For this list, we used a stock screener to identify dividend-paying companies with yields over 4.5% as of February 24. From this list, we selected companies known for strong dividend histories and consistent dividend payments. We then chose the top 10 stocks from this list based on the number of hedge funds holding stakes in them at the end of Q4 2024, according to Insider Monkey’s database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
10. British American Tobacco p.l.c. (NYSE:BTI)
Number of Hedge Fund Holders: 25
Dividend Yield as of February 24: 7.87%
British American Tobacco p.l.c. (NYSE:BTI) is a manufacturing company, based in London. It mainly specializes in cigarettes, tobacco, and various other nicotine products. The company saw accelerated growth in the second half of the year, fueled by innovations in its New Categories segment, strategic investments in US commercial initiatives, and a reversal of previous wholesaler inventory movements. Looking ahead to 2025, regulatory and fiscal challenges in Bangladesh and Australia are expected to impact its combustibles segment. However, the company remains confident in building on its progress as it moves from an investment phase to full-scale implementation. It remains focused on achieving its mid-term targets of 3-5% revenue growth and 4-6% adjusted profit from operations growth, on a constant currency basis, by 2026.
British American Tobacco p.l.c. (NYSE:BTI) regarded 2024 as a year focused on investment, with its performance aligning with expectations. Over the year, it advanced its transformation efforts, adding 3.6 million adult consumers to its smokeless product segment, bringing the total to 29.1 million. These products now account for 17.5% of total revenue, marking a 1.0 percentage point increase from fiscal 2023. In FY24, the company reported £25.8 billion in revenue, reflecting a 5.2% decline from the previous year. This drop was largely due to the sale of its operations in Russia and Belarus in September 2023, as well as unfavorable currency translation effects. In the past 12 months, the stock has surged by over 26%, which makes it one of the best stocks to invest in.
British American Tobacco p.l.c. (NYSE:BTI) currently pays a quarterly dividend of $0.7431 per share and has a dividend yield of 7.87%, as of February 24. The company has maintained strong cash flow generation, consistently achieving 100% operating cash conversion over the past five years, including a 101% conversion rate in 2024—exceeding its 90% target. The company generated £7.9 billion in free cash flow before dividends last year while operating cash flow surpassed £10 billion. Over the past five years, it has returned £28 billion to shareholders through a combination of steady dividend growth and a sustainable share repurchase program. In 2024, it launched £0.7 billion in share buybacks, with an additional £0.9 billion planned for 2025.
9. Enbridge Inc. (NYSE:ENB)
Number of Hedge Fund Holders: 27
Dividend Yield as of February 24: 6.4%
Enbridge Inc. (NYSE:ENB) is a Canadian multinational pipeline and energy company. This business maintains a high level of reliability, as its revenue is primarily derived from fees for utilizing its critical infrastructure. Unlike commodity prices, which can fluctuate significantly, the company’s financial results are more directly influenced by the demand for oil and natural gas—markets that generally remain stable even during price declines. Enbridge’s midstream operations contribute roughly 75% of its earnings before interest, taxes, depreciation, and amortization (EBITDA). In the past 12 months, the stock has surged by nearly 21%.
Enbridge Inc. (NYSE:ENB) posted adjusted earnings of $6.04 billion in 2024, up from $5.74 billion in the previous year. The company successfully finalized its $14 billion acquisition of three US-based natural gas utilities, expanding its footprint and unlocking new growth opportunities for 2025 and beyond. With this acquisition, Enbridge has become the largest natural gas utility operator in North America. Its transmission network now transports roughly 20% of the natural gas consumed in the US, positioning the company to capitalize on the rising demand for natural gas, particularly as tech firms develop gas-powered facilities to support electricity needs for AI-driven data centers.
Enbridge Inc. (NYSE:ENB) maintained a solid cash position throughout the year. It generated $12.6 billion in operating cash flow for the full year, compared to $14.2 billion in 2023. Additionally, its distributable cash flow (DCF) grew by 6% year-over-year, reaching $12.0 billion, up from $11.3 billion in the prior year. It currently offers a quarterly dividend of C$0.9425 per share and has a dividend yield of 6.4%, as of February 24. It is one of the best stocks for passive income as the company has raised its payouts for 30 straight years.