When the Federal Reserve raised interest rates again by 25 basis points, investors seeking stable holdings needed to consider income stocks to buy. The Fed’s benchmark rate is rising to a range of between 4.75% and 5.0%. This is the highest federal funds rate since 2017.
Ideally, the best income stocks to buy pay a dividend that yields at least 4.75%, which is the risk-free rate of return from holding cash and bonds.
Investors could have booked a yield as high as 5.309% on March 8, by holding the U.S. 6-month treasury. The downside of holding interest-bearing assets is that the investor must hold until maturity.
In addition, the tax rate on interest income is higher than dividend income. Investors would miss out on stocks poised to rebound from their decline. The stock price rise adds to the dividend returns.
|CPG||Crescent Point Energy||$6.91|
|WBA||Walgreens Boots Alliance||$34.00|
Altria Group (MO)
Altria Group (NYSE:MO) is a controversial tobacco firm that is pivoting to non-nicotine products. At its investor day event, Altria announced its smoke-free volume and revenue targets.
Sales from tobacco and smoke-free products make Altria one of the top income stocks to buy. After it completes the acquisition of electronic cigarettes and vaping products distributor NJOY Holdings, investors should expect Altria to raise its guidance.
The firm will deliver adjusted diluted EPS growth in the mid-single digits annually through 2028. This forecast does not include NJOY’s contribution.
The company set a new progress dividend target. It has a goal of raising its dividend in the mid-single digit percentage each year. To pivot away from smoking-based products, Altria established a U.S. smoke-free portfolio. It believes it may deliver smoke-free volume by a minimum of 35%.
Altria has new products in development that will increase its growth. For example, SWIC has tobacco-filled capsules. On! PLUS is a nicotine pouch that consumers may enjoy anywhere.
Crescent Point Energy (CPG)
Crescent Point Energy (NYSE:CPG) is an oil and gas company based in Canada. In 2022, it minimized its capital expenditures, which strengthened its balance sheet. The company increased its base dividend. In addition, it returned around $500 million to its shareholders by paying dividends and buying back stock.
For 2023, Crescent Point targets a cash flow of $1 billion, assuming WTI crude prices at $75.00. CPG stock is trading lower because WTI crude prices closed below $70 last week. Fortunately, the firm may cut expenses to increase its earnings per share, reduce net debt and remain one of the best income stocks to buy.
The optimized energy portfolio will pay off in the next few years. Free cash flow will grow while debt declines. Chances are good that as oil prices climb, Crescent Point will increase its dividend more than expected. Its 5-year business plan forecasts over $4.2 billion in cumulative cash flow. CPG stock is effectively trading close to its future cash flow total.
Magna International (MGA)
Magna International (NYSE:MGA) is an automotive parts supplier. In the fourth quarter of 2022, the company reported sluggish revenue growth. Revenue grew by 5.5% Y/Y to $9.6 billion.
Magna is among the best income stocks to buy, thanks to its partnership with Fisker (NASDAQ:FSR). In 2021, the firms finalized a manufacturing agreement. As Fisker ramps up production of its electric vehicles, investors may bet on that growth through Magna stock.
FSR stock is a pure play for EV investors while Magna pays a growing dividend. Its last 46-cent per share dividend declaration is an increase from the previous payment. Magna pointed out that it increased its dividend per share by an average of 11% since 2010.
In 2023, when the supply chain in the automotive market stabilizes, Magna may renegotiate its contracts. While discussions continue, the company will cut costs by achieving operational efficiency. This will increase cash flow and establish another dividend hike in the future.
Realty Income (O)
Realty Income (NYSE:O) is a widely held REIT. Its monthly dividend is the 120th dividend increase. Income investors are not showing their appreciation for the small but steady dividend increase.
O stock traded as high as $75.40 in the last year. As the stock falls, investors who took advantage of the $55.50 low in Oct. 2022 have another chance to increase their allocation.
Realty Income is careful not to look into debt refinancing at higher interest rates. Instead, it looks at the debt capital market over the next three years. It will take advantage of establishing a credit revolver extension at lower rates. When the Federal Reserve eventually cuts interest rates, Realty Income will probably re-finance more of its debt.
Real estate acquisitions are a source of growth. In the last four years, CEO Sumit Roy said that it grew the business at 5% CAGR. The firm may leverage its core strengths. That includes size, cost of capital, and scale. Competitors have a tough time competing against Realty Income’s advantages.
State Street (STT)
State Street (NYSE:STT) is a financial services firm. After its share price fell, investors get a discount on this income stock to buy. In the last quarter, deposits fell by almost 10% year-on-year and sequentially. Eventually, fears of a bank deposit runoff must end.
State Street navigated through interest rate cycles before. The latest 25 bps rate hike will not hurt the $1 trillion in client deposits. Chief Financial Officer Eric Aboaf said that clients are shifting their deposits among its global advisors, State Street products and money market.
In addition, they are holding more interest-bearing assets. CFO Aboaf expects them to increase their holdings in assets that pay interest. This reduces the risk of clients withdrawing their deposits.
The bank should enjoy higher margins from net interest income. By the end of this year and into 2024, NII should stabilize at higher levels. Customers will slow their asset allocation out of non-interest-bearing assets. Such assets earn fewer profits for State Street.
Teck Resources (TECK)
Teck Resources (NYSE:TECK) announced a $250 million stock buyback besides its $0.625 a share dividend on Class A shares.
Zinc mining is Teck’s growth driver. It is focusing on copper production, so investors benefit from multiple markets. On Mar. 16, 2023, Teck announced Teck Trail Operations committed to Zinc Mark. Zinc Mark is a framework that promotes responsible production practices.
In February, Teck announced it would spin off its steelmaking coal business to shareholders. The reorganization lets investors choose between a base metals producer and a steelmaking producing unit. The metals unit should retain an investment-grade rating. The steelmaking coal unit will expose investors to the strong long-term steel market.
TECK stock is sharply below the $46.43 reached only a month ago. Investors who buy the stock at these levels will earn a modest dividend plus capital gain if the share prices rebound.
Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance (NASDAQ:WBA) is a pharmacy store chain. The company has almost 9,000 stores and it deals with customers consistently.
It extended its familiarity with customers through a digital solution. CEO Roz Brewer said that it had around 60 million digital engagements with them.
To fuel growth, Walgreens acquired its remaining stake in Shields Health for $1.37 billion in Sept. 2022. This will support its specialty pharmacy unit.
It acquired full ownership of CareCentrix last Oct. 2022 for around $392 million. WBA is among the inexpensive income stocks to buy as it integrates those businesses. It might outperform expectations after it realizes cost savings.
In the next few quarters, Walgreens might grow script volume from 2% in Q1 to 3% by Q2. Marketing programs will boost growth among its thousands of stores.
The markets are worried that Walgreens will lose customer traffic volumes as Covid-related treatments slow considerably. Still, Respiratory Syncytial Virus is one of many diseases that will require a visit to a pharmacy.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.