3 Dividend Stocks That Are Coiled Springs for a Lifetime of Passive Income

There are plenty of ways to generate passive income, from risk-free assets to bonds to income from rental properties. But one of the simplest and most effective means of generating income is to invest in dividend stocks, while provide passive income without the need to sell an asset, while also allowing you to participate in the stock market.

Finding a company that can grow in value while distributing dividend payments is a dream come true for long-term investors. And that’s exactly what Microsoft (NASDAQ: MSFT) and Air Products and Chemicals (NYSE: APD) are.

Meanwhile, the J.P. Morgan Equity Premium Income ETF (NYSEMKT: JEPI) yields a whopping 7.6% and includes exposure to top companies from Amazon to ExxonMobil. Here’s what makes Microsoft, Air Products, and the J.P. Morgan Equity Premium Income ETF worth buying now.

Microsoft’s dividend is one part of an impeccable investment thesis

Daniel Foelber (Microsoft): Microsoft’s mere 0.7% dividend yield results from its outperforming stock price, not a lack of raises. Over the last five years, the stock is up 223%, but the dividend has increased by 63%. Zoom out over the last decade, and Microsoft is up a jaw-dropping 906%, while the dividend is up 168%.

Given the stock’s strong performance, Microsoft investors surely don’t mind the low yield. But investors who don’t own Microsoft and are considering buying the stock may wonder why the 0.7% yield is worth it, let alone grounds for a lifetime of passive income.

The reason is that Microsoft can easily afford to make sizable increases to its dividend every year. Earnings have grown at a faster rate than dividend raises, which is why the payout ratio is now at a 10-year low of less than 25%.

A payout ratio under 75% is good for a reliable company, but below 50% is even better if a company has cyclical earnings. Part of the reason for Microsoft’s low payout ratio is that it rewards its shareholders with stock repurchases and dividends. Microsoft has reduced its share count despite its sizable stock-based compensation expense. Buybacks are an important means of preventing dilution, and we can expect buybacks to continue to accelerate and the outstanding share count to meaningfully decrease over the coming years.

If Microsoft keeps outperforming the S&P 500, then the dividend will merely be a cherry on top of a winning position. But if Microsoft languishes, expect the yield to noticeably increase thanks to strong dividend growth and room for the payout ratio to go up if needed. Either way, Microsoft has what it takes to reward shareholders.

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Air Products is a stalwart stock that could deliver decades of dividends

Scott Levine (Air Products): It may be impossible to look into the future and see which stocks will provide investors with years of passive income, but it’s certainly helpful to turn your attention to the past. With a peak at a company’s previous performance, you can gain insight into how strong a candidate it is to achieve years of returning capital to shareholders. Air Products is a prime option.

Over its 80-year history, Air Products has emerged as a leading provider of industrial gases and related equipment to businesses operating in a variety of industries, including energy, aerospace, and healthcare, to name a few. For forward-looking investors, today’s a great time to gas up on Air Products stock, which currently has a 2.9% forward-yielding dividend and is hanging on the discount rack.

Growing its dividend for 42 consecutive years, Air Products has demonstrated a steadfast commitment to rewarding shareholders. With respect to the more recent past, it’s worth noting the company’s dedication to its payout. From 2014 through 2024, Air Products has hiked its dividend at a 9% compound annual growth rate, while averaging a payout ratio of 62.3% over the past 10 years.

Because the company serves a wide variety of industries, it’s unlikely a downturn in any one would wreak havoc with the company’s financials, thus jeopardizing the dividend. Moreover, the company has a strong competitive advantage. Operating over 750 production facilities and over 1,800 miles of industrial gas pipeline, Air Products has developed a robust infrastructure that could hardly be disrupted by upstart industrial gas companies. Add to this the company’s commanding position as a hydrogen supplier, and the allure of Air Products becomes even more obvious.

With shares of Air Products valued at about 15.2 times operating cash flow — a discount to their five-year average cash flow multiple of 17.4 — now seems like a great opportunity to start of position in this industrial gas powerhouse.

This ETF’s 7.6% yield is attractive for income-seeking investors

Lee Samaha (J.P. Morgan Equity Premium Income ETF): If you are looking for a monthly income ETF with equities exposure and a strategy to generate relatively low returns compared to the S&P 500 index, then this ETF could be for you. I’ve covered it in more detail as an ETF to buy elsewhere, but I’ll run through the key points here for brevity.

In a nutshell, the ETF invests at least 80% of its assets in actively managed U.S. equities and up to 20% in a strategy of selling call options on the S&P 500 index. A call option on the index is the right to buy the index at a specific price, called the strike price, up to an expiration date. Investors in call options have to pay a premium for that right.

As such, when this ETF sells a call option, it’s looking to pick up the premium by the index not rising above the strike price, so investors don’t realize the option. You could summarize the strategy as follows:

• When the S&P 500 rises sharply in the month, the ETF will lose money on selling call options but make money due to its equity exposure.

• When the S&P 500 falls sharply in the month, the ETF will probably lose money on its equities exposure but make money picking up premiums.

• In low-volatility months, the ETF should earn money by picking up premiums and may make or lose money on equities.

The ETF’s total return (generated by reinvesting dividends) since inception in 2020 is an incredible 59.2%, and the maximum drawdown in a month was 6.4% in September 2020. Overall, it’s a good record, and the monthly income will suit investors looking to live off of passive income.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

3 Dividend Stocks That Are Coiled Springs for a Lifetime of Passive Income was originally published by The Motley Fool