In this article, we will discuss the best stocks to buy for passive income.
With rising costs in today’s world, people are constantly searching for ways to earn additional income. To do this, many rely on side hustles to make ends meet. A recent survey of 2,300 people by Bankrate revealed that over a third (36%) of US adults have a side job. This trend is proving increasingly profitable. In 2023, side hustles brought in an extra $810 per month on average; this year, that figure has grown to $891.
While side hustles have proven profitable for many, some individuals prefer earning income passively rather than through additional work. During the 2020 pandemic, vending machines emerged as a popular passive income idea. From 2019 to 2023, mentions of passive income and vending machines on platforms like X and Instagram more than tripled and grew sixfold, respectively, according to the social media management company Sprinklr. Google searches for passive income also surged by about 75% during that time. Although many Americans are earning money from this investment, its long-term success has yet to be fully proven.
The concept of earning passive income becomes more straightforward and clear through investing in stocks, particularly dividend equities. These investments have already demonstrated their value, consistently delivering strong returns in the past. Over the years, the portion of personal income derived from dividends has gradually risen, making them a significant source of earnings. As reported by S&P Dow Jones Indices, dividend income has grown from 2.68% in the fourth quarter of 1980 to 7.88% in the second quarter of 2024, while interest income has dropped from 14.58% to 7.61% during the same timeframe. The report also mentioned that since 1936, dividends have contributed to over one-third of the total returns from the broader market, while capital gains have accounted for the remaining two-thirds.
Also read: 12 Best Long-Term Stocks to Buy According To Warren Buffett
Dividend stocks with higher yields often attract investors. In addition, companies that have consistently increased their payouts over the years are excellent for generating passive income. As long as they maintain this trend, they offer a growing stream of income, often with less volatility than regular stocks. While these stocks may not always provide the highest yields compared to other dividend-paying options, patient investors who choose companies that raise their dividends consistently, regardless of market conditions, can eventually enjoy income streams that surpass the returns from bonds.
The growing significance of dividend stocks is evident in the steady increase in payouts by companies worldwide. Global income investors experienced a robust second quarter of 2024, with payouts rising 5.8% to a record high of $606.1 billion, according to the latest Janus Henderson Global Dividend Index report. Following this strong performance and considering the anticipated contributions from new dividend payers, the forecast for 2024 dividends has been revised upward. It is now expected that global companies will distribute $1.74 trillion in dividends, a 6.4% increase from 2023 on an underlying basis (up from the previously forecasted 5.0%) and a headline increase of 4.7% (up from the earlier estimate of 3.9%). With this, we will have a look at 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 September 16. From this list, we selected companies known for consistently increasing their dividends, ideally those that have done so for at least 10 years. We then chose the top 7 stocks from this list based on the number of hedge funds holding stakes in them at the end of Q2 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 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
7. Realty Income Corporation (NYSE:O)
Number of Hedge Fund Holders: 19
Dividend Yield as of September 16: 5.04%
Realty Income Corporation (NYSE:O) is a California-based real estate investment trust company that invests in commercial properties across the country. The company is a good option for income investors because it pays monthly dividends to shareholders. The stock is up by nearly 7% since the start of 2024. These strong returns followed a period of steady declines caused by rising interest rates after the pandemic. With interest rates remaining higher than they were before the pandemic and not expected to return to those lower levels soon, the company is well-positioned to capitalize on this new environment.
Realty Income Corporation (NYSE:O) has a strong balance sheet, which is mainly supported by its portfolio. In the second quarter of 2024, the company reported a strong occupancy rate of 98.8%, collected 105.7% of the rent from re-leased properties, and achieved a 0.2% increase in same-store rental revenue. Its portfolio, which mainly consists of single-tenant, net-leased properties, helps reduce financial pressure. With tenants including Wynn Resorts, Dollar General, and FedEx, the company benefits from a reliable revenue stream. In addition, it oversees over 15,000 commercial properties across 89 industries. Its resilience during recessions is demonstrated by its key sectors, such as supermarkets and convenience stores, which perform well regardless of economic conditions. The company’s revenue for the quarter came in at $1.28 billion, which showed a 29% growth from the same period last year.
Realty Income Corporation (NYSE:O) ended the quarter with approximately $443 million available in cash and cash equivalents. On September 10, the company declared a 0.2% hike in its monthly dividend to $0.2635 per share. This was the company’s 127th dividend increase since it went public in 1994. With a dividend growth streak of 30 years, O is one of the best stocks to buy for passive income. As of September 16, the stock has a dividend yield of 5.04%.
At the end of Q2 2024, 19 hedge funds tracked by Insider Monkey owned stakes in Realty Income Corporation (NYSE:O), down from 25 in the previous quarter. These stakes are collectively valued at more than $135.3 million. With over 1.6 million shares, AEW Capital Management was the company’s leading stakeholder in Q2.
6. Enterprise Products Partners L.P. (NYSE:EPD)
Number of Hedge Fund Holders: 23
Dividend Yield as of September 16: 7.09%
Enterprise Products Partners L.P. (NYSE:EPD) is an American midstream natural gas and crude oil pipeline company that offers related products and petrochemicals. Unlike many other energy companies that rely on commodity prices to drive their revenue and earnings, Enterprise Products earns fees for utilizing its assets. Consequently, the demand for energy is more critical to its performance than the prices of the products transported through its midstream system. Since energy demand stays strong even when prices are low, this model provides a level of stability. In the second quarter of 2024, the company reported revenue of $13.5 billion, up 27% from the same period last year.
In addition to its revenue, Enterprise Products Partners L.P. (NYSE:EPD)’s operating income also jumped to $1.8 billion in Q2 2024, from $1.5 billion in the prior-year period. Its strong cash flow supports its dividend payments. The company generated $1.8 billion in distributable cash flow (DCF) in the most recent quarter, which grew from $1.7 billion in the same period last year. Its operating cash flow was $2.1 billion, up from $1.9 billion in Q2 2023. In addition, the company’s payout ratio is sustainable. For the twelve months ending June 30, the payout ratio, which includes distributions to common unitholders and buybacks of partnership common units, was 55% of the adjusted cash flow from operations.
Enterprise Products Partners L.P. (NYSE:EPD), one of the best stocks to buy for passive income, offers a quarterly dividend of $0.525 per share. In July this year, the company achieved its 26th consecutive year of dividend growth. The stock’s dividend yield on September 16 came in at 7.09%.
As of the close of Q2 2024, 23 hedge funds in Insider Monkey’s database owned stakes in Enterprise Products Partners L.P. (NYSE:EPD), which remained unchanged from the previous quarter. These stakes have a total value of nearly $310 million. Among these hedge funds, Fairholme (FAIRX) was the company’s leading stakeholder in Q2.
5. Altria Group, Inc. (NYSE:MO)
Number of Hedge Fund Holders: 36
Dividend Yield as of September 16: 7.71%
Altria Group, Inc. (NYSE:MO) is a Virginia-based tobacco company that manufactures a wide range of related products including cigarettes and other nicotine products. The company’s progress continues to gain traction as it works toward its vision of responsibly guiding adult smokers toward a smoke-free future. In the second quarter of 2024, its innovative smoke-free products showed strong market share and volume growth, achieving key milestones that are expected to drive future success. NJOY secured the first-ever FDA marketing granted orders for menthol e-vapor products, and the company submitted PMTA applications to the FDA for the next generation of NJOY and on! products.
Altria Group, Inc. (NYSE:MO) reported revenue of $5.28 billion in Q2 2024, which fell slightly by 3% from the same period last year. However, its traditional tobacco businesses remained resilient, even in a challenging operating environment. These highly cash-generating operations continued to support ongoing investments in the company’s innovative product initiatives. The company ended the quarter with $1.8 billion available in cash and cash equivalents.
On September 13, Altria Group, Inc. (NYSE:MO) declared a quarterly dividend of $1.02 per share, having raised it by 4.1% in August this year. This marked the company’s 55th consecutive year of dividend growth, which makes MO one of the best stocks to buy for passive income. The company has also remained committed to its shareholder obligation, returning $1.7 billion to investors through dividends in the most recent quarter. The stock supports a dividend yield of 7.7%, as of September 16.
Insider Monkey’s database of Q2 2024 indicated that 36 hedge funds owned stakes in Altria Group, Inc. (NYSE:MO), compared with 38 in the previous quarter. These stakes are collectively valued at nearly $960 million.