This article will survey the best income stocks to buy in the current stock market. Income stocks should be a cornerstone of every long-term diversified portfolio. They provide a balance to growth stocks and bonds, and generate important ongoing income for retirees.

High-yield income stocks come in a variety of flavors, each delivering different sized dividends depending on risk. You have to decide what level of risk you are comfortable with before choosing which income stocks to buy.

There are many unknown income stocks out there because, until recently when the Fed lowered rates to almost zero, average investors weren’t aware that these stocks even existed.

The most common income stocks are so-called “blue chip stocks”, which are legacy companies paying dividends. Those are just fine, but I prefer unusual income stocks that deliver higher yields with less theoretical risk.

The Best Income Stocks For 2019

If you’re in a hurry, below are our top picks for income stocks.

1. Ashford Hospitality Trust Preferred Series G: A stable hotel company with a long-term track record of paying dividends
2. Icahn Enterprises L.P.: Invest alongside the greatest investor in history, Carl Icahn.
3. UBS E-TRACS Wells Fargo Bus Dev Comp ETN: A basket of stocks that makes high-yield loans to fast-growing businesses.

Continue reading to learn more about each of the best income stocks in the market, and my thoughts on each.

What Are Income Stocks?

Good income stocks result from successful companies that have executed well over a long period of time.

As a company is more and more successful, it earns more and more profit, and generates more and more free cash flow. The company can use that cash in many ways. It can invest it back in the business, pay down debt, or reward shareholders by paying a dividend.

Thus, a stock that pays a dividend becomes an income stock.

But there are many variations on this model. In the case of the stocks I’m writing about today, they operate on a different level, even though the base concept of a company generating cash flow remains.

I mention a preferred stock as one of my picks.

A stock gives you ownership in a company. A bond is a loan to that company, and you get paid interest for that loan. A bond puts you in first position to get your money back if the company goes under. Stocks and bonds are used to finance company activity.

Preferred stock permits a company to raise money without diluting company ownership and allows bondholders to stay in top position to recover their investment. In exchange for owning this preferred stock, the company pays a generous dividend.

Preferred stock pays a higher rate than a bond because it is theoretically riskier because preferred shareholders are second in line to get their money back if a company goes bankrupt.

Thus, preferred stocks are income stocks.

Another type of income stocks are Business Development Companies, or BDCs. BDCs provide debt and equity financing to fast-growing companies who can’t get financing through banks.

BDCs generate income from debt investments and capital gains from equity investments. These investments usually range in size from $5 million to $25 million. BDCs want experienced management at established companies that have positive cash flow.

Because these loans are risky, they pay a generous dividend.

Read Also: What are the best mid-cap stocks to own?

How Do You Determine What Qualifies As The Best Income Stocks?

The best income stocks usually have these two characteristics:

1. A company that has plenty of cash flow to pay its dividend.
2. A history of paying a regular dividend (and raising it, when possible)
3. Judicious use of free cash flow

Plenty of cash flow to pay a dividend

It stands to reason that if a company is known as one of many reliable income stocks, it has plenty of cash flow to pay out that income.

Free cash flow should be thought of as the blood in a company’s veins. Without good blood flow, not enough oxygen reaches the brain, right? That’s why cholesterol is bad.

A company needs free cash flow to finance all the things it needs to do, such as pay the company’s everyday expenses, pay interest on debt, pay down debt, expand, and pay dividends to shareholders.

If a company is drowning in debt, that means more cash flow has to be diverted to pay interest and to pay off debt. That’s why debt is like cholesterol in arteries – it clogs them up.

As a company matures, it should produce more and more cash flow. Hopefully, the company pays down its debt and more and more cash flow can be diverted to paying dividends.

A history of paying a regular dividend

Following up on the idea of regular cash flow, the best income stocks are stocks whose cash flow is so reliable and consistent, that it always pays a dividend.

Even better, a company that continues to grow – even if it grows slowly – can increase its dividend over time. The highest-paying income stocks have been increasing dividends for years, or even decades.

In fact, there’s a whole category of income stocks calls “dividend aristocrats”. These are income stocks whose cash flow has been so robust, and growing so reliably, that they have raised their dividends every year for at least twenty-five consecutive years.

Judicious use of cash flow

This final characteristic may seem a bit vague, so let’s parse it out a bit. I mentioned that a company that has free cash flow can use it in many ways. How it specifically uses that cash flow is what I mean as “judicious use”.

For example, a company that has announced a big expansion strategy may put much of that free cash flow to use to open new stores, so that it can capture more of its market. That’s judicious, as long as they don’t overspend and keep paying a dividend.

A company that uses free cash flow to pay down expensive debt is another judicious use of money. If the company pays a 3% dividend but is paying 5% interest on debt, it would be a better idea to pay down that debt than raise the dividend.

Judicious use will be specific to each company.

Here’s a video that gives additional information on investing in the most valuable clothing stocks.

Ashford Hospitality Trust Preferred Stock Series G

Ashford Hospitality is a hotel real estate investment trust. It owns 119 properties and 25,000 rooms across many different well-known brands. Ashford management has a combined experience in hotels of well over 100 years.

All of its current debt is non-recourse, meaning the debt is not attached to the company itself but are only mortgages on its hotels.

The special things about Ashford’s preferred stock are that they pay very high dividends. The Series G pays 7.875%, making it one of the highest yielding income stocks out there. Even better, it presently trades at $21.76 per share, below its original offering price of $25.

Thus, you are not only getting the generous dividend, but a stock that is trading at 13% below its intrinsic value.

Even better, during the financial crisis of 2008-9, Ashford cut its common dividend like all other hotel REITs, but never cut its preferred dividend, whereas most other hotel REITs did.

Read Also: What are the best airline stocks?

Icahn Enterprises L.P.

Icahn Enterprises LPisn’t generally considered one of the top income stocks, but I disagree. While best known as the publicly-traded vehicle that permits investors to invest alongside Carl Icahn, since it is his holding company, it pays $7 per share in dividends.

As of this writing, that equates to a 10% yield!

Icahn Enterprises stock has experienced a lot of volatility over the years, so you are going to have to have a stomach for risk. However, over the long term, Icahn is literally a better investor than even Warren Buffett.

The stock is also trading around $68, which is closer to a multi-year low than it is a multi-year high. So you are, in one sense, getting the stock at a value price.

The other benefit of owning Icahn Enterprises stock is that it operates as a quasi-mutual fund. Icahn tends to have numerous holdings inside company, so you are getting exposure to a broad range of assets, which he often obtains at a value price.

UBS E-TRACS Wells Fargo Bus Dev Comp ETN

UBS E-TRACS Wells Fargo Bus Dev Comp ETN invests in a basket of Business Development Companies that pay sizable distributions.

BDCs are attractive when it comes to income stocks, because BDCs borrow funds at low rates and raise money by offering equity, and then invest capital in fast-growing companies at higher rates of interest.

These companies have already established a solid business and robust cash flow. However, they still need cash to fund more growth. They often have used up their bank credit lines.

Thus, BDCs replace banks. They offer these companies debt, and earn between 9% and 17% in interest for these loans.

The reason BDCs are often the highest-paying income stocks in the market is because, by law, BDCs must distribute 90% of their net income. These distributions usually exceed 7%.