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Best Income Shares | Passive Investing

Tom Cleveland trader
Updated 14 Jun 2024

Income stocks are investments that typically disburse a share of profits to investors through dividend payments, and as such the higher paying dividend stocks will most likely be on your list. Most companies, including listed ones, are, in fact offer some level of income but to significantly differing degrees. We want to look at four of the best income offering shares on the market to consider over the coming year.

It is rare for a company to capitalise via raising equity and not at some point commit to returning funds to investors via dividends, but rare does not mean it does not happen. When companies have areas to invest in the business that are expected to add growth, there may be more of a case to continue exploring these opportunities. For the vast majority of mature companies however, delivering income back to shareholders is one of the best ways that they can provide value to holders, and ensure their stock is competitive and in demand in the market.

Some groups like Berkshire Hathaway operate solely on a capital appreciation model, but the firm themselves collect dividends for reinvestment. Others, like Apple, prefer to return most of the funds marked for disbursement to investors via stock buybacks instead of dividends, but even mega cap tech these days have started offering some level of dividend. Despite these exceptions, by and large, a listed company will, at some point, commit to paying dividends and fall under the bracket of income shares once they are established enough and past that ‘growth’ stock phase.


When choosing to invest in a company on the stock market, one must first decide if the transaction is a turnaround on the capital appreciation, i.e., an exploitative opportunity or a long-term decision to draw an income from a company business model in which you believe. 

Once you’ve made this decision, you can start to sort through the shares planning to pay a dividend. You can then rank the dividend yield and payout ratios: dividend yield = amount paid in dividend per payout period over the share cost, payout ratio = amount paid to dividends from cash flow generated, eliminating from your portfolio those you believe are too risky or not producing enough return. 

How to Build a Portfolio of Income Shares

There is a proven process for building a portfolio of income shares. Before looking at stock possibilities, you must understand your risk tolerance and long-term investment goals. If you are wary at this point, it may be best to seek the assistance of a professional advisor to help with the process.

Diversification will be an overall objective. You will want to spread your risk over several investment sectors and industries to reduce the impact of any single stock or sector on the fund’s overall performance. If you are uncomfortable buying individual stocks, you might want to consider shares in an Exchange-Traded Fund (ETF) focused on income stocks.

Investing in a mixture of short-term and long-term assets can also act to balance income and preserve capital. Adding international stocks and bonds to a portfolio is another way to provide diversification and potentially higher yields than domestic assets can provide.

Lastly, do not forget to monitor your portfolio over time. You will want to regularly review your choices and rebalance them as necessary. Continual monitoring will ensure that your portfolio choices remain aligned with your investment goals and risk tolerance.


Other Considerations to Keep in Mind

One should look for a few key elements when considering an income share for your portfolio. First and foremost, you will want steady and dependable returns since you may be holding these investments for an extended period. Look for companies that have established a good track record over several years by maintaining a strong competitive advantage in their sector.

These companies will typically excel at marketing their brand and display a technological advantage over their competitors. These intangibles could be the competitive edge needed to continue as a leader in a specific industry. 

Timing will also be critical in choosing when to invest in these stocks. They tend to be popular investments, and investors may have bloated the price of these shares, so alternatives with similar risk profiles may be more acceptable. 

Best Income Shares to Invest In

What are Worthy Examples of Income Shares on the Market Today?

Now that you have decided upon the desired outcome and the approximate mix of income-generating securities, it is time to execute your strategy. Here we provide a few shares to consider when balancing your portfolio. 

Each company discussed below provides near-best-in-class returns, excellent governance, and decent underlying growth that will shield your returns now and into the future. The four firms are Enbridge Inc., JP Morgan, Union Pacific Corporation, and Johnson & Johnson.

Enbridge Inc (NYSE:ENB)

For the passive income seeker, there are few better investments over the last several decades than energy infrastructure and, in particular, ENB. 

In the last 30 years, the dividend yield for ENB has never fallen below 2%, and at the moment, it is above 6%. Good corporate governance and defendable margins with a decent moat have kept this stock in passive fund favour for decades. 

ENB is an energy infrastructure player across North America, specialising in oil & gas pipelines. It profited hugely from Canada’s oil production increase in recent years and its supply growth to the USA.

Energy infrastructure investments are preferable to income-share investors for several reasons. 

Reliable income stream: energy infrastructure assets such as pipelines, terminals, and storage facilities tend to generate a stable and predictable cash flow, providing a reliable income stream for a passive income fund.

Low correlation with other assets: the returns on energy infrastructure assets tend to have a low correlation with other assets, such as stocks and bonds, which can help diversify a portfolio and reduce overall risk.

Inflation protection: energy infrastructure assets tend to have returns tied to inflation, which can help protect against the erosion of purchasing power over time.

Long-term investment horizon: energy infrastructure assets tend to have long-term investment horizons, which align well with the long-term investment horizon of a passive income fund.

Potential for capital appreciation: energy infrastructure assets have the potential for capital appreciation and income, which can provide a source of growth for the fund.

Growing demand for energy: the growing population and the increasing demand for energy, especially from developing countries, will result in higher energy consumption, driving the demand for energy infrastructure assets.

JP Morgan (NYSE: JPM)

JPM is a large and diversified commercial, investment, and retail bank. Primarily operating out of North America, the bank also complements some of its income streams through the international operations of its investment bank. 

This large and diversified plant of operations centred in the powerhouse of the US economy provides the income share investor with a stable and secure environment through which to derive earnings. 

JPM has historically paid a very stable dividend yield of just above 2%, with short stretches near 0.5% during the Global Financial Crisis (GFC) and presently closer to 3% on strong investment bank earnings. 

Large financial institutions, particularly JPM, are an excellent addition to your passive income fund for several reasons. Large US investment banks tend to pay dividends, which can provide a reliable income stream for a passive income fund. The same entities will typically have solid financials and a wide range of revenue streams, which can provide stability for the fund.

Another benefit is that investments in these companies can act as a hedge against inflation. Returns tend to be tied to inflation, which can help protect against the erosion of purchasing power over time. Lastly, these firms have a strong track record of consistently paying dividends, providing a sense of security for the fund.

Union Pacific Corporation (NYSE:UNP)

Long the darling of Warren Buffet’s Berkshire Hathaway, railroads form the bedrock of the US economy. A healthy US economy is reflected in motion, and tradable goods still rely heavily on the US commercial rail network. 

UNP, through its subsidiaries, transports materials across the Lower 48 states. 

Over the last 34 years, UNP has averaged a yield of 1.5% or higher and is climbing steadily on the oil production boom in the US. The yield is currently 2.4%.

A railroad can be a good dividend stock to own for several reasons. Firstly, railroads have significant barriers to entry, as they require large investments in infrastructure and equipment. This can lead to a lack of competition and strong pricing power for established railroads. Additionally, railroads often have long-term contracts with customers, providing a steady revenue stream.

Furthermore, US railroads are considered essential infrastructure and are less affected by economic downturns than other industries. This can lead to more stable earnings and dividend payments. Additionally, they are less exposed to changes in fuel prices, as the locomotives can be more efficient than other forms of transportation.

Finally, railroads tend to have a large asset base, including rail tracks and other infrastructure. This can provide a cushion for dividend payments during difficult economic times.

Johnson & Johnson NYSE:JNJ (JNJ)

There are few industries so non-cyclical and central to the economy than healthcare. In a quote attributed to Benjamin Franklin, there are only two certainties in life, death and taxes. With the government holding the keys to taxes for the share investor, healthcare forms the backbone of one of the more dependable sources of income. 

JNJ is the largest combined pharmaceutical and healthcare company by market capitalisation. Through their trusted consumer brands and new drug development, they reside over a large market segment and house a rock-solid balance sheet. 

These characteristics make JNJ a good choice for a dependable stream of income returns for a passive fund. With a dividend yield rarely dipping below 2% and presently 2.5%, an investor in JNJ can expect to see his investment grow steadily over time, regardless of the macroeconomic environment. 

A pharmaceutical company can be an excellent addition to a passive fund for several reasons. Firstly, the pharmaceutical industry is characterised by high barriers to entry, as it requires significant investments in research and development to bring new drugs to market. This can lead to a lack of competition and strong pricing power for established pharmaceutical companies. Additionally, pharmaceutical products have patents, which can provide a temporary monopoly and a steady revenue stream for the company.

Secondly, the demand for pharmaceutical products is relatively stable, as people will continue to need medication regardless of the state of the economy. This can lead to more stable earnings and dividend payments. Moreover, demographic trends such as the ageing population and increasing rate of chronic diseases can lead to increasing demand for pharmaceutical products in the future.

Finally, pharmaceutical companies tend to have a strong pipeline of new drugs in development, which can provide growth potential.


Final Thoughts

There are many different approaches to investing in income shares and developing your passive fund. Take your time to make the best decisions when allocating to your portfolio, as these are shares you will hold for years, possibly decades. Always do your due diligence and consult with the experts where you can.

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Tom has over 30 years of experience in the payments industry, including serving as CFO for various Visa International entities from 1980 until 1999, retiring with the title of Group EVP and Treasurer.