It has not been the best of times for investors who prefer to own stocks that spin off regular income via dividend payments. While the S&P 500 is up about 18% this year, the SPDR Portfolio S&P 500 High Dividend ETF
And, with U.S. Treasury bills yielding around 5%, the entire U.S. Treasury market (out to 30 years to maturity) comfortably above 4%, and inflation a lingering threat, dividend stocks have a higher hurdle to climb to get investors’ attention than they have in many years.
Are Dividend Stocks Good For Passive Income?
Now, the good news: investing is, if nothing else, cyclical. So just as dividend stocks have been an also-ran in an era of artificial intelligence (AI), self-driving cars and FAANG (Facebook–now Meta–Amazon
Passive income is cash hitting your brokerage account as a result of you being a shareholder in a stock on the date each quarter when its ex-date occurs. Anyone who holds the stock on that date is entitled to a dividend payment (note that if you purchase a stock on the ex-date you are not entitled to the next dividend payout), which represents a portion of the company’s profits that they pay out to shareholders, instead of keeping that money in the business to devote to growth projects and operational expenses. This reminds us that owning shares of stock truly means you own a piece of the company.
So, for investors who like the idea of receiving regular cash payments (dividends), and balance that with the risks of owning stocks, dividend stocks can be solid sources of regular, passive income. Because as long as an investor continues to own the stock and that stock pays dividends, the investor gets their fair share, so to speak, based on how many shares of stock they own.
With inflation running at 3.7%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.
5 Best Dividend Stocks For Passive Income
This article focuses on five stocks I selected from that aforementioned group of the 80 highest yielders in the S&P 500 Index. My process for arriving at these five stocks includes a combination of three main areas: fundamental valuation analysis, technical analysis and the goal of presenting a diversified mix. At least, as diversified as a five stock list can be. These stocks are all larger companies, with market capitalization of at least $15 billion.
3M (MMM)
Market Cap: $59 billion
Dividend Yield (Forward): 5.6%
Price/Sales Ratio (TTM): 1.8
This industrial company, a longstanding member of the Dow Jones Industrial Average, has been around since 1902. Consumers know MMM for Post It notes, Scotch Tape and more than 100,000 patents in a wide variety of industries. But MMM is also now offering its highest dividend yield since it started paying a dividend, back in the 1980s. That is the result of some up and down years that have the stock trading at nearly 60% below its 2018 peak.
MMM is a “Dividend Aristocrat,” which is a name given to companies that have grown their dividends every year for decades. In the case of 3M, it has done so for an impressive 64 years. Given that the stock market has relegated some iconic companies like this one to “bargain basem*nt” situations, MMM is a potential long-term comeback story, with investors paid a very high level of passive income while they wait.
Kraft Heinz (KHC)
Market Cap: $41 billion
Dividend Yield (Forward): 4.8%
Price/Sales Ratio (TTM): 1.5
If 3M is an old company, KHC could be its grandfather! The Heinz Corporation, known for its ketchup, pickles, condiments and many other food brands, dates back to 1869, founded in Pittsburgh just after the Civil War. It merged in 2015 with Kraft, a household name first in dairy products and now in an array of brands. The combined business had some growing pains as a combined entity, but selling at a modest 1.5 price/sales ratio, a dividend yield more than three times that of the S&P 500 Index, and operating in the consumer staples sector–the products people buy in good times and bad–KHC is another name-brand that could turn out to be a long-term provider of passive income.
Fifth Third Bancorp ITB
Market Cap:$18 billion
Dividend Yield (Forward): 5.0%
Price/Sales Ratio (TTM): 2.2
Affectionately known by many in the Midwestern U.S. as “the fraction,” FITB is even older than the two companies mentioned above. The Cincinnati-based commercial bank dates back to 1858. It has a very diverse revenue stream, including asset management, brokerage, cash management and a loan portfolio that spans from smaller business customers to very large ones. The banking industry scare earlier this year has FITB’s stock price down about 25% from a year ago, pushing its dividend yield up to 5%. At that rate, FITB’s passive income payment to shareholders is higher than at any point in modern history, other than the 2008 and 2020 market crises.
With inflation running at 3.7%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.
Duke Energy DUK
Market Cap: $70 billion
Dividend Yield (Forward): 4.5%
Price/Sales Ratio (TTM): 2.5
Duke is one of the largest U.S.-based electric utility stocks, providing power to customers in Florida, the Carolinas and parts of the Midwest. It's business combines coal, hydroelectric, natural gas, oil, solar and wind sources, as well as nuclear. Typical of that sector, its dividend is relatively high, but doesn’t grow at a very fast rate (about 2% annualized the past five years).
As a leader in its sector, DUK stands a good chance to benefit from a secular boom in infrastructure spending in the U.S. It has grown its dividend for 11 years in a row, and its stock is down about 10% this year, setting DUK up to be a potentially above-average source of passive income.
Phillips 66 PSX
Market Cap: $54 billion
Dividend Yield (Forward): 3.4%
Price/Sales Ratio (TTM): 0.4
PSX, another long-tenured business (1875), is an energy and logistics company based in the U.S., but with additional operations in the United Kingdom and Germany. It operates across much of the oil and gas “food chain,” from drilling to transport to gas stations. PSX has participated in the recent surge in oil stock prices, but that has only brought it back to where its price was in late 2019. It has a chance to provide passive income in addition to the upside potential of an increasingly bullish backdrop in the energy sector.
Bottom Line
The S&P 500 has been flat for the past two years. That puts the pursuit of passive income back in the spotlight for investors. The five stocks highlighted here are part of a broader group of dividend stocks investors can consider as possible pieces of a passive income strategy.
With inflation running at 3.7%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.
