It’s never been easier as a passive income investor to give your yield a bit of a jolt with the rise of covered call (and premium income) ETFs that trade off a bit of upside potential for some premiums. And while the popular class of niche ETFs hit the right spot for many passive investors who want to give themselves a raise without having to risk more of their invested principal as they would with higher-yielding stocks that have severely stretched (and perhaps stressed) free cash flow payout ratios, I do think that investors, especially younger ones who aren’t yet closing in on retirement, should take a more balanced approach. Indeed, that means considering how growth (which tends to come at the expense of yield) factors in.
In any case, the best passive income plays not only have safe, well-covered distributions or dividends with above-average yields, but also those that are capable of delivering a reasonable amount of growth over time. It’s these high-yielders that can still grow, that can be total return gainers, that don’t require passive income investors to forgo capital appreciation as they go after the more towering yields on the market.
Here are two passive income plays that I think may allow income investors to construct a portfolio that not only has a respectable yield but also has a decent amount of growth potential.
Johnson & Johnson
Johnson & Johnson (NYSE:JNJ) is a 3.4%-yielding blue chip that defensive dividend investors really can’t go wrong with, especially on weakness. The stock hasn’t done much in the past five years (a mere 5% gain), but the dividend is well-covered and subject to above-average growth if Johnson & Johnson can get back on the growth track. As a $377 billion juggernaut in healthcare, it can be tough to find enough needle movers to power sales growth meaningfully.
Either way, the stock is too cheap (17.4 times trailing price-to-earnings (P/E)) while it’s stuck in its multi-year correction (down 14% from 2022 highs). And its growth pipeline, I believe, seems quite underrated by Wall Street.
The company sees its innovative medicine pipeline and MedTech (medical devices) business both enjoying a compound annual growth rate (CAGR) in the 5-7% range over the next few years. Such growth could translate into continued generous dividend hikes for investors who continue to hold the stock despite recent underperformance. With a low 0.41 beta and a below-market multiple, perhaps JNJ stock could be one of the names that could be spared once the S&P experiences its next retreat.
McDonald’s
McDonald’s (NYSE:MCD) is another dividend payer that’s also capable of some respectable single-digit growth. With some upgrades following the recent wave of downgrades, it didn’t take long for Wall Street to warm up to the Golden Arches on the dip. As it turned out, Mad Money’s Jim Cramer was spot-on in recommending buying the name into weakness.
With the International Menu Heist (which features limited runs of international menu items including Germany’s Big Rosti and Japan’s Teriyaki Chicken Sandwich) showing promise in Canada, while the Snack Wrap’s return and a Spicy McMuffin looking to spice things up for summer, I think the name continues to be a sound dividend growth play to pick up this July, as the stock comes roaring back.
Despite industry headwinds and inflation, McDonald’s has found ways to attract diners via new product launches and menu innovation. Add the value menu, resilience, and international store expansion into the equation, and it seems like McDonald’s has more than one way to move higher from here, even as Trump’s tariffs were to further unsettle markets going into August.
The yield sits at a modest 2.42%, but the low beta (0.56) and appetite for market-share gains, I believe, make the name a worthy buy, even at 26.6 times trailing P/E.
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