Passive income is crucial to maintaining your lifestyle during retirement. After all, the Social Security Administration warns that it may not be able to pay full benefits after 2035, underscoring the importance of alternative sources of income.
While stocks aren’t necessarily the most stable sources of passive income due to their volatility, dividend-paying stocks can provide a solid foundation for a broader passive income portfolio. The key is to identify companies that offer a margin of safety and a top-notch dividend program.
The following two stocks meet these criteria, making them excellent additions to a passive income portfolio. Let’s explore their potential.
Toyota Motor: A Proven Power Creator
Toyota engine (NYSE: TM) is a global leader in the automotive industry and is known for its ultra-high-quality vehicles and innovative hybrid technology.
Toyota shares trade at a forward price-to-earnings (P/E) ratio of 8, which is significantly lower than the broader market. For comparison, the S&P 500 trades at more than 21 times expected earnings. Toyota’s low valuation provides a margin of safety in the event of a market-wide downturn.
The automaker also pays a respectable dividend yield of 2.19%. To put that in context, the average stock on the S&P 500 pays just 1.35%. On the earnings front, Wall Street expects the company to deliver modest growth of 3.38% in fiscal 2025. That’s not explosive growth, but it’s decent for a company Toyota’s size.
Toyota’s investment appeal lies in its strong brand, efficient manufacturing processes and leadership in hybrid vehicles. The company’s conservative approach to electric vehicles (EVs) could prove wise if the transition is slower than some expect.
Now, Toyota faces challenges from aggressive EV-focused competitors and potential shifts in consumer preferences. That said, the Japanese auto giant has the financial resources and expertise to adapt quickly if necessary.
Pfizer: An Underrated Pipeline and a Sky-High Return
Pfizer (NYSE: PFE) is a pharmaceutical giant struggling to gain traction in a post-pandemic world. Despite significant investment in mergers and acquisitions to acquire a host of potential blockbusters, Pfizer shares trade at just 10.9 times forward earnings at current levels.
By contrast, the average large-cap pharma stock trades around 17 times forward earnings (according to the author’s own data). Worse, the shares are down nearly 23% over the past 12 months.
As a direct result of this double whammy, Pfizer’s dividend yield currently stands at an eye-popping 5.94%, one of the highest in the entire healthcare sector. By 2025, Wall Street expects the drugmaker to return to revenue growth, with revenue growth forecast at 3.8%. While not stellar growth, it’s respectable for a mega-cap pharmaceutical company with a generous dividend policy.
The investment thesis for Pfizer focuses on its undervalued pipeline of novel oncology drugs, robust cash flow and attractive dividend program. The company’s massive size and proven research capabilities also provide a comfortable margin of safety for long-term investors.
However, upcoming patent expirations and potential drug pricing reforms could impact profits somewhat over the next decade. These challenges underscore the importance of Pfizer’s continued efforts to replenish its pipeline and diversify its revenue streams.
Key Points
These two value stocks offer attractive dividend yields and the potential for long-term capital growth. Toyota and Pfizer both have strong underlying businesses, well-established market positions and the financial resources to tackle the challenges of the industry.
For investors looking to build a passive income portfolio with a focus on value and stability, these two blue-chip stocks are worth serious consideration. After all, the chances of either of these industry giants dying out over the next two decades are virtually zero.
Should You Invest $1,000 in Toyota Motor Now?
Before you buy Toyota Motor stock, you should consider the following:
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George Budwell has positions in Pfizer. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
2 Cheap Passive Income Stocks to Buy Now was originally published by The Motley Fool
