The 10 Best Income Stocks

"Best income stock now" means the stock in question is well-suited to the current and reasonably foreseeable future. At the moment, that means rising but not runaway inflation, and rising but not runaway interest rates. This argues in favor of companies that own tangible things that will go up in value with inflation. I'd put land, oil and gas reserves, copper, nickel and iron deposits, energy infrastructure, timber and the like in this category. It argues against companies that depend on borrowing to increase their revenue and earnings and that use leverage to increase their earnings and cash flow. Many limited partnerships in the energy sector and many real estate investment trusts fall into this category.

My Top 10

Rising interest rates means it's time to look for growth-oriented income stocks. You don't have to do it overnight. With the first reading on growth in second-quarter gross domestic product coming in at 3% Friday, below the consensus forecast of 3.7%, interest rates aren't about to zoom higher. But they will be higher in 2005 than they are now, and income investors ought to reposition all or part of their portfolios accordingly.

OK, now to my list (in alphabetical order) of the 10 best income stocks now.

BP(BP Quote): It makes this list over ExxonMobil(XOM Quote) because of its higher dividend yield (3% to 2.4%) and over other oil majors because, thanks to its Russian joint venture, the company is virtually assured of reaching its goal of increasing output by 5% a year for the next five years. The company raised its dividend to 42.6 cents per ADR from 40.5 cents when it reported second-quarter results July 27.

Citigroup(C Quote): A bank? What's it doing here? Well, how often do you get to buy one of the world's great banking franchises with a 3.6% yield? Everyone knows that bank stocks will get hammered when interest rates rise, which is why Citigroup's stock is down 8.5% in the last six months. But if you're willing to hold for two years, as I outlined above, you're just about guaranteed the safe return of your capital. The bargain is likely to get even better later this year and into 2005, so you might want to wait on this one before you buy.

FPL Group(FPL Quote): In its July 23 second-quarter earnings report, the company said it was highly confident that 2004 earnings per share would fall between $5.05 and $5.15 and confident that earnings momentum will continue into 2005. But that confidence seems a lot more convincing to me because the board at this Florida utility holding company voted to increase the dividend by 10% to 68 cents a share from 62 cents for shareholders of record as of Aug. 27. The stock now yields 4.1%.