Some investors take a more active approach to stock ownership. They keep a close eye on daily market developments and trade relatively regularly. This allows them to buy stocks when they are low and profit when they are high.
Other investors, however, are less interested in activity and are content to simply buy and hold without frequent checks on their portfolio. Dividends often figure prominently as part of their plan, which (ironically) often produces better net returns than those achieved by their more active counterparts.
If the latter style sounds more like you, here’s a look at three stocks that can provide decades of passive income, whether you decide to spend that cash flow or reinvest the dividends in more shares of the company that pays them.
1. Bank of America
You probably know that Warren Buffett’s Berkshire Hathaway has its interest in Bank of America (NYSE: BAC) in a big way. All told, Berkshire has sold just over 90 million shares of the bank at last count — about a tenth of its total position — in the past few weeks, netting nearly $4 billion in proceeds. Buffett’s growing disinterest in owning the bank is understandably concerning.
But there may not be as much to worry about as is being suggested. Capital gains tax rates could be rising soon, and now that Buffett has grown to Berkshire’s second-largest position, he may simply be thinking strategically about ways to balance the portfolio in a cost-effective way. In a similar vein, Berkshire recently divested a large portion of its stake in Applewhich is by far the largest position.
But just because the Oracle of Omaha is cutting its stake in BofA doesn’t mean it’s not a good fit for your portfolio. It’s still a very strong dividend stock, currently offering a forward-looking dividend yield of nearly 2.8%.
And that’s based on a dividend, by the way, that has grown every year since 2016 at an average annual rate of over 20%. This year’s increase is over 8% better than the previous quarterly payment. Moreover, since the bank still earns far more per share than it pays out (last quarter’s earnings of $0.83 per share versus the new quarterly payment per share of $0.26), there’s room and reason to believe this dividend And Dividend growth remains assured even if the worst economic scenario becomes reality.
2. Real estate income
Real estate income (NYSE: O) may not be a household name. However, there is a good chance that you or someone living in your household regularly visits a Realty Income property.
How does that work? Realty Income is a real estate investment trust, or REIT for short. That simply means it owns rental properties and passes on most of the rental income to shareholders. There are all sorts of REITs, ranging from hotels to shopping malls to apartment buildings. Realty Income, however, focuses on retail properties. It owns more than 15,000 shopping centers, standalone retail locations, and even warehouses and distribution centers that it leases to consumer-facing companies.
It’s a troubling specialty — at first. Retailers everywhere seem to be struggling not only with online competition but also with an oversaturated market thanks to aggressive expansion from the late 1980s to the early 2000s.
Realty Income is largely immune to the retail horror stories you still read about on a regular basis, if its current 98.8% occupancy rate is any indication. This REIT’s tenant roster is comprised almost exclusively of the country’s most resilient retailers. Some of its best tenants include Dollar General, WalgreensAnd FedExThese are companies with the resources to explore a location in great detail and who only enter into a long-term lease if they are confident they can make the required rental payments.
At least that’s what the REIT’s dividend history suggests. Realty Income has not only paid a dividend (yes, a monthly dividend) every month for 649 consecutive months, but it has also increased that payment in each of the past 107 quarters. The current yield is over 5.2%.
3. PepsiCo
Finally add PepsiCo (NASDAQ: PEP) to your list of long-term passive income prospects, while the forward-looking dividend yield is just over 3.1%. Investors consistently compare this ticker to The Coca-Cola Companyand rightly so. After all, both are big names in the beverage industry. They are natural competitors with similar operations and seemingly similar cost structures.
However, these two companies are as different as they are similar. While Coca-Cola outsources the production and distribution of its products to third-party bottlers who simply purchase flavored syrups from the company, PepsiCo owns most of its own bottling operations and handles its own distribution.
While PepsiCo’s model ultimately results in lower profit margins, it also gives PepsiCo complete control over all key aspects of its business. That can be a huge strategic advantage. PepsiCo is also the parent company of snack chip brand Frito-Lay, which includes Lay’s, Cheetos, Fritos, Doritos and others, which diversifies its revenue stream.
That’s not the main reason why an income-oriented investor would choose PepsiCo over Coca-Cola, however. Rather, the advantage PepsiCo stock has over Coca-Cola is its higher yield and stronger dividend growth. Coca-Cola’s current forward-looking dividend yield is just 2.8%, and over the past 10 years, the company has only increased its quarterly payment at an annual rate of less than 5%. PepsiCo’s dividend has grown by more than 7% on average over the same period.
Sure, Coca-Cola has a longer track record of uninterrupted annual dividend growth, at 62 years. However, PepsiCo is nearly as impressive in terms of consistency, with 51 consecutive years of annual dividend growth.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, FedEx, and Realty Income. The Motley Fool has a disclosure policy.
Want Decades of Passive Income? 3 Stocks to Buy Now was originally published by The Motley Fool
