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.
4. United Parcel Service, Inc. (NYSE:UPS)
Number of Hedge Fund Holders: 44
Dividend Yield as of September 16: 5.12%
United Parcel Service, Inc. (NYSE:UPS) ranks fourth on our list of the best stocks to buy for passive income. The American multinational shipping and supply chain management company offers various related services to its consumers. The company has faced challenges adapting to a changing operating environment, with reduced shipping demand and rising inflationary costs. It fell short of high-growth expectations as market observers noticed a decline in package volumes. Additionally, earnings were impacted by increased fuel and labor costs, which squeezed profit margins. In the second quarter of 2024, the company reported revenue of $21.8 billion, which showed a 1.07% drop from the same period last year. The revenue also missed analysts’ expectations by over $418 million.
Due to the company’s struggling phase, ClearBridge Investments decreased its position in United Parcel Service, Inc. (NYSE:UPS) in Q2 2024. This is what the firm said about UPS in its second-quarter investor letter:
“Our industrials holdings weighed on relative performance as we are more exposed to transports such as “less than truckload” provider XPO and parcel delivery company United Parcel Service, Inc. (NYSE:UPS), which are struggling with weak volumes during the post-COVID freight recession. With industry volumes down to pre-COVID levels and strong pricing power in the LTL space in particular, we believe that the next upcycle will prove to be very strong for earnings. As a result, we added to XPO in the quarter while reducing our position in UPS on concerns that industry capacity remains excessive. Meanwhile, we have less exposure to electrical equipment stocks, which have been rewarded by views that they will benefit from the buildout of AI data centers.”
That said, early indications of a potential turnaround in the company’s latest update provide investors with some optimism. According to United Parcel Service, Inc. (NYSE:UPS)’s earnings report, this quarter marked a key milestone, as the company achieved volume growth in the US for the first time in nine quarters. As anticipated, operating profit for the first half of 2024 declined compared to the previous year. However, the company expects to see a return to operating profit growth moving forward.
In addition to this, United Parcel Service, Inc. (NYSE:UPS) also reported a strong cash position, which is positive news for income investors. In the first six months of the year, the company generated an operating cash flow of $5.3 billion, and its free cash flow came in at over $3.3 billion. It has raised its payouts for 22 years in a row. Currently, the company offers a quarterly dividend of $1.63 per share and has a dividend yield of 5.12%, as of September 16.
According to Insider Monkey’s database of Q2 2024, 44 hedge funds owned stakes in United Parcel Service, Inc. (NYSE:UPS), up from 43 a quarter earlier. These stakes are worth over $1.3 billion in total. With over 2.5 million shares, Marshall Wace LLP was the company’s leading stakeholder in Q2.
3. Chevron Corporation (NYSE:CVX)
Number of Hedge Fund Holders: 64
Dividend Yield as of September 16: 4.64%
Chevron Corporation (NYSE:CVX) is a Texas-based multinational energy company that specializes in oil and gas. As an integrated energy company, its operations span the entire energy sector, including oil and natural gas production (upstream), energy transportation (midstream), and chemicals and refining (downstream). Each of these segments tends to perform differently at various times. For instance, the downstream segment often benefits from lower oil and gas prices, which negatively affect the upstream. Meanwhile, midstream pipelines generate stable cash flows throughout the energy cycle. Chevron’s diversified operations help cushion the natural highs and lows of the volatile energy sector.
Chevron Corporation (NYSE:CVX) reported strong earnings in the second quarter of 2024. The company generated over $51 billion in revenues, which showed a 4.7% growth from the same period last year. It boasts one of the strongest balance sheets among its peers, with a debt-to-equity ratio of around 0.15, which is low for any business. What’s most significant, however, is that this gives Chevron the financial flexibility to take on more debt during industry downturns, allowing it to maintain support for its operations and dividends. Its payouts are also supported by strong cash flow generation. In the most recent quarter, the company reported an operating cash flow of $6.3 billion and its free cash flow was $2.3 billion.
Chevron Corporation (NYSE:CVX) remained committed to its shareholder obligation, returning $6 billion to investors through dividends and share repurchases in Q2 2024. This marks the ninth consecutive quarter in which over $5 billion has been returned to shareholders. On August 2, it declared a quarterly dividend of $1.62 per share, which was in line with its previous dividend. Overall, the company has been rewarding shareholders with growing dividends for the past 37 consecutive years, which makes CVX one of the best stocks to buy for passive income. The stock has an impressive dividend yield of 4.64%, as recorded on September 16.
At the end of June 2024, 64 hedge funds owned stakes in Chevron Corporation (NYSE:CVX), up from 62 in the previous quarter, as per Insider Monkey’s database. These stakes have a total value of over $22.4 billion. Warren Buffett’s Berkshire Hathaway owned the largest stake in the company in Q2.
2. Verizon Communications Inc. (NYSE:VZ)
Number of Hedge Fund Holders: 67
Dividend Yield as of September 16: 6.10%
An American multinational telecommunications company, Verizon Communications Inc. (NYSE:VZ) ranks second on our list of the best stocks to buy for passive income. The company offers a wide range of communications, technology, and entertainment products and services to its consumers. It has been growing its 5G network since it was first introduced five years ago. With a strong spectrum portfolio and a widespread fiber optic network, the company claims to offer the most reliable 5G service in the U.S., covering over 200 million people. Verizon Communications recently revealed plans to acquire fiber-optic internet provider Frontier Communications in an all-cash deal valued at $20 billion, aiming to expand its subscriber base. This move will also strengthen its position against competitors AT&T and T-Mobile, who are focusing on unlimited plans and bundled services. Since the start of 2024, the stock has surged by over 15%.
Verizon Communications Inc. (NYSE:VZ) reported strong earnings in the second quarter of 2024. The improvements seen, both sequentially and year-over-year, reflected the company’s operational excellence and efforts to provide customers with greater choice, value, and control in their lives. The company reported a revenue of $33 billion, up 0.61% from the same period last year. Its total wireless service revenue of nearly $20 billion also showed a 3.5% YoY increase.
Verizon Communications Inc.’s (NYSE:VZ) strong cash flow is another key factor that has caught the interest of investors. In the first six months of the year, the company reported an operating cash flow of $16.6 billion and its free cash flow for the period came in at $8.5 billion. The free cash flow grew from $8 billion in the prior-year period.
On September 5, Verizon Communications Inc. (NYSE:VZ) declared a 1.9% hike in its quarterly dividend to $0.6775 per share. This was the company’s 18th consecutive year of dividend growth, which makes VZ one of the best stocks to buy for passive income. As of September 16, the stock has a dividend yield of 6.10%.
Verizon Communications Inc. (NYSE:VZ) was a part of 67 hedge fund portfolios at the end of Q2 2024, the same as in the previous quarter, according to Insider Monkey’s database. The stakes held by these hedge funds have a collective value of over $1.5 billion.
1. Pfizer Inc. (NYSE:PFE)
Number of Hedge Fund Holders: 84
Dividend Yield as of September 16: 5.74%
Pfizer Inc. (NYSE:PFE) is an American multinational pharmaceutical and biotech company that develops a wide range of medicines and vaccines. Despite the stock being down nearly 11% over the past year, analysts are hopeful about a potential rebound in its performance, which was significantly impacted after the pandemic. In the second quarter of 2024, the company’s revenue came in at $13.3 billion, which showed a 4.3% growth from the same period last year. In addition, a strong 14% increase in operational revenue from non-COVID products during the quarter highlighted the company’s ongoing commitment to effective commercial execution.
Parnassus Investments also mentioned various reasons to add Pfizer Inc. (NYSE:PFE) to income portfolios, despite its recent underperformance. Here is what the firm has to say about the company in its Q1 2024 investor letter:
“During the quarter, we added new positions in Pfizer Inc. (NYSE:PFE), NICE and Charter Communications. We purchased Pfizer to capture the potential upside from any turnaround following the COVID-induced boom-bust cycle of the last few years. Pfizer’s stock price sank by more than 40% in 2023 as COVID-19 vaccine revenues rolled off, providing an attractive entry point for us. The company completed its acquisition of Seagen, which should strengthen Pfizer’s pipeline in antibody-drug conjugates (ADC). Pfizer also offers an attractive dividend yield.”
Pfizer Inc.’s (NYSE:PFE) dividend also makes it an attractive investment opportunity for income investors. The company’s dividend growth streak currently spans over years and it has never missed a dividend in 85 consecutive years. Moreover, in the first six months of the year, the company returned $4.8 billion to shareholders through dividends. It pays a quarterly dividend of $0.42 per share. With a dividend yield of 5.74% as of September 16, PFE is one of the best stocks to buy for passive income.
Pfizer Inc. (NYSE:PFE) was also popular among elite money managers, as hedge fund positions in the company jumped to 84 in Q2 2024, from 77 in the preceding quarter, as per Insider Monkey’s database. The stakes held by these hedge funds have a total value of more than $3.6 billion.
Overall, Pfizer Inc. (NYSE:PFE) ranks first on our list. While we acknowledge the potential for PFE to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PFE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.
