The 7 Best Investments for Passive Income in 2023
While it’s always a good time to consider the best investments for passive income, this category enjoys significantly boosted relevance based on recent events. As you’ve undoubtedly heard, the banking sector suffered a severe confi…
While it’s always a good time to consider the best investments for passive income, this category enjoys significantly boosted relevance based on recent events. As you’ve undoubtedly heard, the banking sector suffered a severe confidence hit due to the collapse of SVB Financial Group. As CNN Business pointed out, it’s the biggest failure of a U.S. bank since Washington Mutual in 2008.
Fundamentally, a deadly combination of higher interest rates, exposure to low-yielding bonds, and pain among technology startups sparked a bank run. Unfortunately, SVB Financial simply lacked the resources to meet everyone’s panicked requests. More critically, it’s possible over the next few weeks and months that the crisis could ripple to other financial institutions.
Therefore, investors need less exposure to risk-on assets and more to enterprises with established and profitable businesses. To achieve this, the best investments for passive income will feature a balance between yield and capital gains potential. Below are some compelling ideas to consider.
Exxon Mobil (XOM)
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As one of the top hydrocarbon energy giants in the world, Exxon Mobil (NYSE:XOM) benefits from ongoing and long-term relevancies. Admittedly, the political and ideological winds favor clean and renewable energy sources. However, because renewables like wind and solar tend to be intermittent, Exxon should benefit from the “consistently-on” nature of hydrocarbons. In other words, crude oil doesn’t need the sun to go up to facilitate power production.
Financially, Exxon delivers an attractive profile for prospective investors of the best investments for passive income. Currently, the company’s three-year revenue growth rate stands at 15.9%, outpacing 72.35% of the competition. Also, its EBITDA growth rate during the same period is 37%, above nearly 79% of the oil and natural gas industry. In terms of passive income, Exxon carries a forward yield of 3.38%. As well, its payout ratio sits at a sustainable 36.46%. Moreover, it enjoys 40 years of consecutive annual dividend increases.
Finally, Wall Street analysts peg XOM as a moderate buy. Their average price target stands at $127.87, implying nearly 19% upside potential.
Phillips 66 (PSX)
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A downstream hydrocarbon energy specialist, Phillips 66 (NYSE:PSX) primarily focuses on the refining and marketing component of the value chain. Fundamentally, this segment should attract considerable demand moving forward. With social normalization trends rising, more people should hit the roadways, leading to greater revenue. Also, with mass layoffs occurring, more people are desperate to hold onto their jobs, a cynical beneficiary for PSX.
Objectively, the numbers also make PSX one of the best investments for passive income. Right now, the market prices shares at a trailing multiple of 4.41. As a discount to earnings, Phillips 66 ranks better than 70.77% of the competition. Also, PSX trades at a sales multiple of 0.28. Here, the company is undervalued compared to nearly 81% of the field. Presently, the energy firm carries a forward yield of 4.15%. Further, its payout ratio sits at 32%, providing confidence regarding yield sustainability.
Turning to Wall Street, analysts peg PSX as a consensus moderate buy. Their average price target stands at $128.20, implying nearly 27% upside potential.
MSC Industrial (MSM)
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An industrial equipment distributor, MSC Industrial (NYSE:MSM) is one of the largest companies of its kind. Also, it’s enjoyed a quietly steady performance among the best investments for passive income. Since the start of the year, it’s up less than 1%. However, it did gain 3% in the past 365 days. In contrast, the S&P 500 index fell more than 7% during the same period.
What makes MSM a candidate for best investments for passive income centers on its resilience. Looking at its balance sheet, the company’s Altman Z-Score is 4.74, indicating low bankruptcy risk. Operationally, its revenue growth of 2.8% over the past three years rates somewhere in the middle of its industry. However, its net margin stands at 9.34%, above almost 86% of the field. Presently, MSC Industrial carries a forward yield of 3.84%. Further, it commands 19 years of consecutive dividend increases, a status it won’t give up on easily. Plus, its payout ratio is 51.55%, which should be sustainable.
Finally, analysts peg it as a moderate buy with an $87.50 price target. This forecast implies over 6% upside potential.
Caledonia Mining (CMCL)
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Billed as a profitable cash-generative gold producer, Caledonia Mining (NYSEAMERICAN:CMCL) admittedly features a high-risk profile among the best investments for passive income. Obviously, Caledonia’s fortunes largely align with the price of gold. However, precious metals can be extremely volatile. Nevertheless, the recent bank run implies that fear has spiked among investors. And gold represents an ideal avenue for assuaging fear due to its intrinsic value.
Fortunately, prospective investors of the best investments for passive income won’t have to rely solely on narrative-based speculation. For instance, CMCL represents an undervalued opportunity, with the market pricing it at a trailing multiple of 5.65. In contrast, the sector median pings at 11.69. Operationally, its three-year revenue growth rate is 15.6%, outpacing 70.36% of the industry. Notably, Caledonia also enjoys a trailing net margin of 21.53%. This helps enable the company to offer a forward yield of 4.29%. As well, its payout ratio is 54.81%, which should be sustainable.
Unfortunately, no analyst covers CMCL. However, the rising relevance of gold makes this an unignorable opportunity.
Based in resource-rich South Africa, DRDGOLD (NYSE:DRD) is both a gold producer and a specialist in the recovery of the metal from the retreatment of surface tailings. Like Caledonia Mining above, DRDGold faces underlying volatility risks. Further, the real possibility of more aggressive interest rate hikes may pressure gold. That said, with the most recent bank run, the Federal Reserve may need to rethink its hawkish strategy.
Setting aside the narrative, investors seeking the best investments for passive income will be attracted to the value proposition. Presently, the market prices DRD at a trailing multiple of 10.34. As a discount to earnings, DRDGold ranks better than 60.71% of the competition. Operationally, its three-year revenue growth rate stands at 14.4%, beating out 68% of the field.
Also, DRDGold’s trailing net margin stands at nearly 22%, outpacing over 84% of its rivals. That’s going to help in the dividend department. Per TipRanks, DRDGold’s dividend yield is 3.6% while its payout ratio is 31.5%. Finally, H.C. Wainwright’s Heiko Ihle pegs DRD as a buy with a price target of $15. If shares get there, this would represent an upside of over 105%.
Marine Products (MPX)
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As a manufacturer and distributor of luxury pleasure boats, Marine Products (NYSE:MPX) might not seem like one of the best investments for passive income given the challenging economic circumstances. However, the wealth gap that widened during the coronavirus pandemic actually benefits the ultra-wealthy, Marine Products’ target demographic. Also, MPX represents a strong market performer, gaining over 13% of equity value in the trailing year.
Objectively, the company offers very attractive financials. First, the market prices MPX at a trailing multiple of 10.9. As a discount to earnings, Marine Products ranks better than 65.26% of sector peers. Operationally, the company’s three-year revenue growth rate stands at 9%, above 73.49% of competitors. Also, its free cash flow (FCF) growth rate during the same period is 13.8%, beating out 63.79% of its rivals.
Further, the enterprise’s net margin is 10.59%, ranked better than almost 90% of sector players. In turn, this helps support the underlying forward yield of 4.32%. Notably, this yield is much higher than the consumer discretionary sector’s average yield of 1.89%. While no analyst covers MPX currently, its undervalued profile should make it one of the best investments for passive income.
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Perhaps the riskiest idea for best investments for passive income, investors should exercise caution with Buckle (NYSE:BKE). As an American fashion retailer selling clothing, footwear, and accessories for men, women, and children, Buckle obviously depends on the whims of consumer tastes. Perhaps not surprisingly, then, BKE is volatile, shedding 17% since the January opener. However, it also gained over 5% in the trailing one-year period.
Financially, there’s plenty to like about BKE stock. First, the underlying enterprise enjoys a cash-rich balance sheet. As well, its Altman Z-Score is 6.04, reflecting fiscal stability. Operationally, the company features a three-year revenue growth rate of 12.9%, outpacing 75.44% of the field. Also, its FCF growth rate during the same period stands at 42.9%, above 81% of the industry.
Quite attractively, its net margin pings at nearly 19%, beating out over 96% of competitors. In turn, this margin bolsters the company’s forward yield of 3.71%. Conspicuously, its payout ratio sits at 29.79%, providing prospective investors with confidence. Finally, Buckle is undervalued, trading at only 7.45 times trailing earnings. Therefore, it makes for an intriguing candidate for the best investments for passive income.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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