The 3 Best Income Stocks to Buy Now - Cabot Wealth Network

The 3 Best Income Stocks to Buy Now

Growth is difficult to come by in this market. Growth and income are even harder. The three best income stocks combine both elements.

The best income stocks today all yield more than 5%.

This is a tricky time to invest.

Inflation is raging. The Fed is way behind the curve and will have to raise rates aggressively. The global economy is dealing with the geopolitical uncertainty and economic fallout from the Russia/Ukraine war.

Although the bull market has certainly sputtered this year, stock prices remain elevated. The S&P 500 is still up 82% from the bear market lows in early 2020 and it’s up 24% from the pre-pandemic high. Stocks sell at very high valuations by historical standards, while problems are growing.

It‘s tough to predict what situation will unfold over the next several months, or which industries will be most affected. Fortunately, there is an area that will surely be in demand regardless of how things shake out – income. And that’s why I’d like to introduce what I think are the three best income stocks today. I’ll get to those in a minute.

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People need income whether the economy is booming or in recession, or if inflation soars or contracts, and regardless of who is president. Cash flow never goes out of style. And income stocks, or dividend-paying securities, are the only game in town for investors to get a decent income in this still-low interest rate environment.

At the same time, there has never been a greater need for investment income. Pensions are increasingly rare. And people are living longer. In fact, it’s common for someone to live another 20 or 30 years after retirement.

Large segments of the population will have to generate income from savings, and dividends are the only game in town. Demand should be very strong for some of the best income stocks. And those stocks should perform well under almost any scenario.

There are currently only 14 stocks in the S&P 500 that pay more than a 5% yield. And not all those stocks are good investments. A high yield is a beautiful thing. But it won’t do you much good if the underlying stock price doesn’t hold up. It is a rare security indeed that can pay a high yield and appreciate in this tough market.

I’ve identified three stocks that offer just that. These are securities that pay yields that are safe and growing and should navigate today’s turbulent waters very well.

The 3 Best Income Stocks Today

Best Income Stock #1: Enterprise Product Partners (EPD)

Yield 7.1%

Enterprise is one of the largest midstream energy Master Limited Partnerships (MLPs) in the country, with a vast portfolio of service assets connected to the heart of American energy production. It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies and offers export facilities in the Gulf of Mexico as well.

The thing that jumps out about this security is the distribution. It currently yields 7.1%. And the payout is rock solid. Distributable cash flow covered the distribution by 1.6 and 1.7 times in the two worst quarters of the pandemic. A ratio of 1.2 is considered conservative.

The stock had been a laggard. It did return 23% in 2021 but that underperformed the S&P 500 in a year when energy was the top-performing sector. It tends to take a rally in the energy sector to get it moving higher, which has certainly been the case this year. EPD has returned 20% already in 2022 and is just coming down from a 52-week high.

Despite the very strong recent performance, EPD is still well below the pre-pandemic high and miles below the all-time high, despite having higher earnings. It still sells at just 11 times forward earnings, which is well below the overall market. And things look very promising going forward.

In an uncertain market, EPD provides a huge and safe income and sells at a bargain valuation in a hot sector that is likely to continue performing well for the rest of the year at least.

Best Income Stock #2: ONEOK, Inc. (OKE)

Yield 5.7%

ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, midcontinent, and Permian regions in key market centers, and also has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.

Here are some things to like about the company and stock.

  • Investment grade rated debt
  • 85% of earnings fee-based
  • 26 years of stable and growing dividends
  • C corporation structure (generates a 1099 and not a K-1)

Earnings are resilient because ONEOK operates in the best segments and is well-positioned in the high growth shale regions. Natural gas is a rapidly growing fuel source that is much cleaner burning than oil or coal. NGL is by far the fastest growing fossil fuel source. Midstream energy is a solid income-generating industry right now. But ONEOK is solid all the time.

There are some great things about the dividend. For one, it is a regular dividend and doesn’t generate a K-1 at tax time. It also qualifies for the maximum 15% tax. It may not be as high as EPD’s yield but it is one of only 14 S&P 500 companies that currently pays a better than 5% yield. OKE has also grown the dividend payout by an average of 13% per year for the past 21 years.

Best Income Stock #3: Global Ship Lease, Inc. (GSL)

Yield 4.4%

Global Ship Lease owns and charters container ships under fixed-rate charters to container shipping companies. The company deals in mid-size and smaller container ships, which are the workhorses of the of the main global containerized trade routes.

Shipping rates exploded during and after the pandemic as congested ports increased demand and the global supply chain couldn’t keep up with exploding demand. But most rates have since pulled back dramatically, except container shipping rates. Those rates have tripled since the end of 2020 and have risen sixfold since before the pandemic. While rates peaked last October, container shipping rates remain at very elevated levels.

Container rates have stayed high because demand for containers is greater and supply is more limited than for other types of shipping. And the supply/demand dynamic is likely to stay favorable for some time.

GSL has had a wild ride, along with the rest of the industry, over the last 10 years. But it has been showing strength and resilience in recent years. Global has consistently grown earnings and revenues over the last three years. The shipper also grew revenues and earnings through the pandemic. Earnings per share grew from $1.48 in 2019, to $2.09 in 2020, to $4.65 in 2021. And stellar growth should continue.

The biggest reason internally is that Global has been growing its fleet. In fact, Global grew its fleet by more than 50% in 2021 alone. Those ships and charters will be accretive to earnings this year.

GSL currently yields a strong 4.4% at the current price. The company just recently initiated a dividend, in January 2021. So, it doesn’t have a track record. But there are some very encouraging things. For one, Global just raised the next dividend by 50%, to $0.375 per quarter from $0.25. It is also triple the initial dividend. And that dividend is well supported with just a 16% payout ratio, with a lot of room to grow.

What are some of the best income stocks you own? Tell us about your favorites in the comments section.

Tom Hutchinson

High Income and Peace of Mind

Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.

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