10 Best Stocks to Buy for Your Income-Generating Portfolio

With the Federal Reserve expected to start raising interest rates in March, some investors feel that this will make it more difficult to find winning stocks to buy. However, the idea that interest rates move markets is debatable. 

As rates rise, it’s possible that income-concerned investors will be less incentivized to buy dividend-paying stocks, opting to put some funds in short-term fixed-income securities or even covered-call exchange-traded funds, such as the Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD), which writes call options on the Nasdaq-100 Index. 

In March 2020, I put together a list of 10 stock recommendations for income-generating portfolios. Three months later, I did a revised version. 

The stocks chosen were part of an income ladder, rising from a 1% yield (1.41%) for Brookfield Asset Management (NYSE:BAM) to a much-riskier 16.49% yield for Icahn Enterprises (NASDAQ:IEP), billionaire Carl Icahn’s holding company. Both have delivered decent gains over the past 19 months. 

I thought it might be time to repeat my exercise of selecting 10 stocks yielding at or around 1%, 2%, 3%, all the way to 10% or beyond. 

• American Express (NYSE:AXP)
• Diageo (NYSE:DEO)
• Pfizer (NYSE:PFE)
• BP (NYSE:BP)
• Store Capital (NYSE:STOR)
• Camping World Holdings (NYSE:CWH)
• British American Tobacco (NYSE:BTI)
• Golub Capital BDC (NASDAQ:GBDC)
• Rio Tinto (NYSE:RIO)
• Artisan Partners Asset Management (NYSE:APAM)

The goal here is to generate a nice combination of income and capital gains from dividend-paying stocks over the long haul. 

Stocks to Buy: American Express (AXP)

Market Capitalization: $135.8 billion

Dividend Yield: 1.2%

Financial services giant American Express reported Fourth-quarter results on Jan. 25. They were off-the-chart good with full-year revenue net of interest expense growing 17% year-over-year to $42.4 billion from $36.1 billion a year earlier. On the bottom line, net income jumped 161% higher to $8.1 billion versus $3.1 billion a year earlier. 

The company sees revenue growth of 19% at the midpoint of its guidance in 2022, with earnings per share of $9.45. Longer-term, it expects to grow revenues and profits by 10% and 15%, respectively. 

Most importantly, from an income perspective, AMEX will increase its quarterly dividend by 21% from 43 cents to 52 cents. The annual rate of $2.08 yields a reasonable 1.2%. 

After the results were released, Bank of America analyst Mihir Bhatia upgraded AXP stock to “buy” from “neutral.”  In a note to clients, the analyst wrote:

The investments AXP has been making through the pandemic, in both card-member retention and acquisitions, are starting to yield results that should drive faster top-line growth and operating leverage in the near-to-medium term, MarketWatch reported. 

Diageo (DEO)

Market Capitalization: $113.4 billion

Dividend Yield: 2.0%

Hot off the presses, Diageo reported its first-half sales on Jan. 27. Revenue rose 16% to GBP 8.0 billion ($10.7 billion) from GBP 6.9 billion ($9.2 billion) a year earlier. Further down the income statement, the liquor giant had an operating profit excluding exceptional items of GBP 2.74 billion ($3.66 billion), up 21.2% from GBP 2.26 billion ($3.02) a year earlier. 

During the pandemic, the maker of Johnnie Walker scotch, Tanqueray gin, Captain Morgan rum and many other famous brands said consumers stocked up the home bar, leading to solid growth. Now that things are reopening, it’s time for bars and restaurants to step up their orders. 

The pandemic proved that in good times or bad, people are still going to have a drink. This makes Diageo not only a decent income generator but also a nice defensive stock in volatile times. 

Stocks to Buy: Pfizer (PFE)

Market Capitalization: $297.5 billion

Dividend Yield: 3.0%

There is no question that Covid-19 has been a godsend for pharmaceutical giant Pfizer. The company expects to generate $36 billion in revenue in fiscal 2021. In the third quarter ended Oct. 3, 2021, its vaccine revenue accounted for 60% of its sales. 

For all of 2021, vaccines will account for approximately 44% of its $81.5 billion in projected revenue. In 2022, vaccine revenue is expected to moderate, hitting $29 billion for the fiscal year. That’s still a significant sum. 

In a rare disappointment, Pfizer’s treatment for pediatric growth hormone deficiency, developed in partnership with Opko Health (NASDAQ:OPK), was recently rejected by the U.S. Food and Drug Administration (FDA). Already approved in several countries, including Canada, the FDA’s rejection took the company by surprise. However, it is working with the agency to see how it can get the treatment’s ultimate approval. 

If you think Pfizer is only a vaccine maker, think again. Scotia Wealth portfolio manager Stan Wong recently discussed the company’s strengths with the Cantech Letter. “I like Pfizer not because of the COVID-19 vaccines and antiviral drugs but their pipeline is really rapidly improving with several recent drug launches that have been very successful,” Cantech Letter reported. He said their cardiovascular drug seems to be very promising, expecting it to add to revenue and earnings going forward “in a major way.”  

BP (BP)

Market Capitalization: $103.4 billion 

Dividend Yield: 4.1%

I’ve never been a fan of companies that peddle fossil fuels. I don’t like what they’re doing to the environment. However, until the world can fully transition to energy sources that don’t require fossil fuels, we are stuck with BP and its ilk. 

Energy stocks haven’t done too well in recent years, another reason to avoid them, but there’s no question that they’re firing on all cylinders heading into 2022. Revenues are up. Profits are up. Life is good. 

Of the big oil companies, I’m leaning toward BP stock because of the company’s realistic view of the energy sector’s future. It’s not in oil; let’s put it that way. 

In September 2021, Reuters reported on BP CEO Bernard Looney’s plans to transition its business to renewable energy:

“He aims to slash BP’s output by 40%, or about 1 million barrels per day, an amount equal to the UK’s entire daily output in 2019. At the same time, BP would boost its capacity to generate electricity from renewable sources to 50 gigawatts, a 20-fold increase and equivalent to the power produced by 50 U.S. nuclear plants,” Reuters reported. 

By investing in BP stock, you get to be on the right side of climate change, while making 4% on your money. What’s not to like? 

Stocks to Buy: Store Capital (STOR)

Market Capitalization: $8.3 billion

Dividend Yield: 5.0%

This real estate investment trust (REIT) is probably best known because Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) is one of Store Capital’s largest shareholders at 9.04%. Only two other institutions own more. However, don’t get too excited. Warren Buffett’s stake in the REIT accounts for just 0.2% of the holding company’s $336 billion equity securities portfolio. 

If you’re not familiar with Store Capital, it owns and manages single-tenant operational real estate. Its 2,788 properties are spread over 49 states, involving 538 companies. Its occupancy rate is a high 99.4%. 

The REIT’s Q3 2021 presentation points out that its target market is almost 215,000 companies. It’s dealing with the cream of the crop. This allows it to be selective in who it does business with. 

Camping World, one of the names on my list, is one of its top 10 customers. The top 10 accounts for 18.7% of the total base rent and 13.6% of the total properties. 

Over the past six years, it’s grown its adjusted funds from operations by 5.1% per annum. That’s led to a 6.8% annual increase in its dividend.

STOR stock is not sexy but its business model works. 

Camping World Holdings (CWH)

Market Capitalization: $2.8 billion

Dividend Yield: 6.1%

On Jan. 24, Camping World announced an increase in its share repurchase program. The largest retailer of recreational vehicles (RVs) in the U.S. originally approved a $225 million buyback in October 2020. 

It’s bought back approximately $177 million of that. The announcement provides an additional $152.7 million to its repurchase program. It now has roughly $200 million outstanding. 

How’s it done repurchasing its shares? In the first nine months of 2021, it bought back $86.8 million of its stock at an average price of $39.30. Based on its current share price, it’s underwater by 17% on those purchases. 

Typically, I’m against share repurchases because companies aren’t very good at knowing when their share prices are cheap. I believe that CWH stock is severely undervalued, so I’ll make an exception. It trades at 0.22x sales, the lowest multiple since 2018.

The company reported record revenue in the third quarter ended Sep. 30, 2021, up 14.2% to $2.97 billion. Its gross margin increased 431 basis points to 36.1%, and its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) jumped 32.7% to $288.0 million. 

As a result, it upped its 2021 full-year adjusted EBITDA guidance to $922.5 million at the midpoint of its guidance, from $850 million previously.  

I expect RVing to stay hot in 2022.

Stocks to Buy: British American Tobacco (BTI)

Market Capitalization: $97.6 billion

Dividend Yield: 7.0%

When you’re putting together one of these income ladders, it’s nice to know you’ve always got a tobacco company in your back pocket to score you some income. Companies like British American Tobacco are virtual printing presses, even today. 

As its investor relations page states, the company is transforming its business, so the impact on society from its products is lower. That means new products that are healthier for consumers but still provide growth. 

As part of its focus on reducing the harm it inflicts on customers with its cigarettes, in 2019, BAT moved to simplify its non-combustible products by creating three global brands: Vuse vapor products, Velo oral products, and Glo tobacco heating products. 

BAT invested more than $4 billion in developing these products. Its goal is to generate GBP 5 billion ($6.7 billion) from its New Categories segment by 2025. Through the first nine months of 2021, it added 3.6 million consumers of its non-combustible products, more than in the entire 2020. 

The plan is working. 

Add in investments made by Btomorrow Ventures, the company’s venture capital arm, along with its 19.9% investment and partnership with Canada’s OrganiGram (NASDAQ:OGI), and you’ve got the makings of an entirely new business.

Golub Capital BDC (GBDC)

Market Capitalization: $2.6 billion

Dividend Yield: 7.7%

Golub Capital BDC is a business development company. This means that it is required to distribute at least 90% of its profits to shareholders to remain in compliance with Section 54 of the Investment Company Act of 1940.

It lends its capital to middle-market businesses, defined as having $100 million in annual EBITDA or less. It usually invests between $10 million and $75 million per company. It can go beyond $75 million in certain circumstances. 

It’s been a good year for Golub Capital. The BDC’s total investments at fair value increased by 15% to $4.9 billion. That’s due to record loan originations in three out of four quarters in 2021. Its top three industries by weight are software (22%), healthcare providers (11%), and a tie between IT services (6%) and specialty retail (6%).

The company increased its quarterly distribution by a penny, with the December 2021 payment to 30 cents. Its annual payment of $1.20 yields 7.7%. 

Stocks to Buy: Rio Tinto (RIO)

Market Capitalization: $122.5 billion

Dividend Yield: 9.3%

Although Rio Tinto’s history dates back to 1873 when a British-European investor group bought the Rio Tinto mines in Spain, the modern-day company got rolling when it merged with Australia’s CRA Limited to form one of the world’s largest mining companies. 

Rio Tinto mines and produces iron ore, aluminum, copper, lithium, diamonds, and more. 

In November 2021, the company became the sole owner of the Diavik Diamond Mine in Canada’s Northwest Territories after buying the remaining 40% from Dominion Diamond Mines. The diamond mine 6.2 million carats of rough diamonds annually. 

In the first six months of fiscal 2021, Rio Tinto had free cash flow of $10.2 billion, 262% higher than in the same period a year earlier. Its underlying earnings were $12.2 billion, 156% higher YOY. 

Of interest to income investors, Rio Tinto paid out a $1.85 per share special dividend in 2021’s first six months. That payout amounted to $3 billion.  

Currently, the company generates 75% of its EBITDA profits from iron ore. It’s looking to change that by acquiring the Rincon lithium project in Argentina for $825 million. With electric vehicle production on the rise, lithium will become a valuable commodity. 

This alone makes RIO stock an interesting bet.

Artisan Partners Asset Management (APAM)

Market Capitalization: $3.3 billion

Dividend Yield: 10.3%

The Wisconsin-based asset manager made my October 2018 list of high-value, high-yield growth stocks to buy. It’s up about 50%, not including dividends. Last summer, its shares were flirting with $60, but have since fallen back considerably.

As I stated back in 2018, I liked the fact employees owned a majority of the business. At the time, it had assets under management of $117 billion. Today, they are $175 billion. 

The company’s revenues through Q3 2021 were $912.2 million, 43% higher than a year earlier. Its operating income increased 65% to $402.7 million from $244.8 million a year earlier.

The key to its business model is that the investment teams are given free rein to implement their investment strategies, which include growth, value, emerging markets, and credit. 

In the first nine months of 2021, it paid out $203.4 million in dividends from operating cash flow of $404.2 million. It’s got more than enough cash flow to keep paying out dividends. 

In 2021, it paid out $3.92 in regular dividends and another 31 cents for a special dividend in February 2021. It pays out approximately 80% of the cash it generates each quarter. Special dividends are paid out when cash flow is more robust than usual. 

If you don’t mind the ebb and flow of dividend payments, APAM remains an excellent buy for income-focused investors.

On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.