3 Top Income Stocks to Buy Now

These companies have provided consistent dividend growth and have benefited from recent events.
By Siddhi Bajaj ,

When looking for a good income investment, a high dividend yield or a history of payments is rarely enough. After all, a high yield could stem from plummeting share prices, making future dividend growth unsustainable.

A classic income investment also must have favorable payout ratios plus the long-term earnings growth potential to sustain healthy dividend payments. Here are three stocks that possess those characteristics. In recent months, each of the companies has made good strategic decisions. In addition, conditions seem favorable. One has invested in the growing autonomous driving trend. Another will benefit from an eventual Federal Reserve rate hike. And the last is seeing its shares near a 52-week high, and the company may have benefited from a recent Supreme Court decision.

Below you'll find a closer look at the three companies and why you should invest now.

1. General Motors (GM) - Get Report

With a dividend yield of 5%, a dividend payout ratio of a mere 22%, and company stock buybacks worth billions of dollars, General Motors is a convincing play for income investors. Yet despite chatter about U.S. auto sales having peaked, GM has room to grow.

Market share is growing in China and will keep doing so if the country's economy picks up.

The Detroit-based company could also benefit from its continued commitment to produce innovative technology, including autonomous vehicles, and keep pace with other trends.

In March, GM bought autonomous vehicle technology manufacturer Cruise Automation for more than $1 billion. The San Francisco-based company produces kits for converting certain types of cars, including Audi sedans, for autonomous highway driving. 

Earlier in the year, it invested about $500 million in ride-sharing service Lyft. GM will work with Lyft on creating rental hubs so that drivers can work without owning a car. 

The company also allayed fears of supply disruptions and massive losses after it reached a settlement with a crucial vehicle parts supplier in Massachusetts that had filed for bankruptcy.

With earnings growth expectations at 14% per year for the next five years, against the industry's 12.4%, GM is a gem.

2. Metlife (MET) - Get Report

American insurer Metlife has been paying a quarterly dividend since 2002 and will pay its next dividend in early September.

To be sure, shares have suffered over the past year amidst the Federal Reserve's decision not to raise interest rates. The result: Treasury yields have plummeted, proving a major headache for Metlife, which has investments in these low-yielding bonds.

Metlife has lost over a quarter of its value during the last year. That said, this may be a great opportunity to enter the stock.

Interest rates will eventually move higher, which will become a tailwind for insurers. Also, the company's planned spinoff of its life insurance unit is expected to augur well, according to analysts.

The spinoff and restructuring will help the company lose its systemically important financial institution (SIFI) designation, which flags it as a risk to the U.S. economy. It will also improve the company's free cash flow (good for dividends) and possibly commence share buybacks in 2017. The insurer's payout ratio is already a healthy 32%.

Analysts have pegged earnings growth for the company at almost 15.93% annually for the next half-decade, compared with 9.24% for the industry.

Until the stock begins its upswing, investors can enjoy a 3.9% dividend yield with Metlife.

3. Reynolds American (RAI)

As sharp contrast to Metlife, shares of Reynolds American, the maker of Camel, Newport and Pall Mall cigarettes, are trading close to their 52-week highs.

The company has been buoyed by surging revenues and profits, as well as by a Supreme Court ruling last month in its favor. The European Union and 26 of its member companies accused the company's subsidiary R.J. Reynolds of complicity in a huge money laundering scheme. The EU countries said that a cigarette smuggling operation had deprived them of customs and tax revenues. The Supreme Court said that the EU countries couldn't file suit under the federal Racketeer Influenced and Corrupt Organizations Act, or RICO, over R.J. Reynolds's conduct abroad.

The company has kept its income investors happy with consistent dividend growth for the past six years, a dividend yield of 3.2%, and the recent announcement of a special dividend of 42 cents paid on July 1. The company has room for sustainable dividend growth with a payout ratio standing at 31.38%.

The earnings growth streak is expected to continue for at least the next half-decade, with Reynolds expected to record 12.2% earnings growth annually, versus a mere 8.56% for the industry.

While some analysts expect stock prices to appreciate up to 15.9% over the next 12 months, dividend growth projections for the upcoming year are even juicier, with an expected increase of 21.73%.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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