For income investors, sustainable and growing passive income is the name of the game. Dividend income at a low risk of being cut often grows over time. And when done right, this income grows as fast or faster than the rate of inflation to help an investor maintain or strengthen their purchasing power.

With a combined streak of 115 consecutive years of dividend growth, here are three blue-chip income stocks that investors should consider adding to their portfolios.

1. Procter & Gamble
With dozens of brands that are commonly used in households, such as Downy fabric softener, Charmin toilet paper, and Pampers diapers, few companies have Procter & Gamble’s (PG) level of brand power. The necessity and enviable name recognition of P&G’s brands afford it a great degree of pricing power. Recession or no recession, babies still need diapers and people still need toilet paper.

This is how the company’s net sales topped $80 billion in its previous fiscal year that just ended in June. For context, that figure was up 5.3% over the year prior. P&G’s diluted earnings per share (EPS) increased 5.6% over the year-ago period to $5.81 in its 2022 fiscal year.

The essential nature of P&G’s products has fueled 66 consecutive years of dividend growth, which is much more than the 50 years required to become a Dividend King. With the dividend payout ratio coming in just below 61% in its previous fiscal year, P&G has the flexibility to maintain its dividend growth for the foreseeable future. And given the 5.8% annual diluted EPS growth that’s expected over the next five years, dividend hikes should at least be in the mid-single-digits percentage annually.

Income investors can pick up shares of P&G and its market-beating 2.8% dividend yield (the S&P 500 index yields 1.7%) at a forward price-to-earnings (P/E) ratio of 22. For a world-class business such as P&G, this isn’t an unreasonable premium compared to the S&P 500 consumer staples sector average forward P/E ratio of 19.8.

2. Realty Income
Realty Income’s (O) $38 billion market capitalization and ownership of more than 11,400 properties positions it as one of the largest real estate investment trusts (REITs) on the planet. And these aren’t just any properties that the company can find. Realty Income typically acquires less than 10% of the property volume that it sources, which means these are the crème de la crème of the triple net lease world.

This bias toward quality is precisely how the company’s adjusted funds from operations (AFFO) per share have only declined once in the past 26 years. Only at the depths of the Great Recession in 2009 did Realty Income experience a slight and temporary dip in AFFO per share. The company’s consistency has resulted in 5.1% annual AFFO per share growth over the past 25-plus years. And with a $12 trillion addressable market in the U.S. and Europe, it will be quite a while before Realty Income’s growth slows down.

Along with a dividend payout ratio that will come in around 76% in 2022, this is why I believe the company can build on its 28 years of dividend growth. Realty Income’s 4.9% dividend yield can be snatched up at a forward AFFO-per-share ratio of just 15.5, which is arguably a sensible valuation for one of the very best REITs out there.

3. Magellan Midstream Partners
Like it or not, the U.S. economy depends on reliable access to crude oil and refined products for its optimal functioning. And Magellan Midstream Partners’ (MMP) energy infrastructure of 9,800 miles of refined products pipelines and 2,200 miles of crude oil pipelines is crucial in transporting commodities from one place to another. Since Magellan’s refined products pipeline system is the largest in the U.S., it isn’t surprising to learn that its system can access almost 50% of the country’s refining capacity.

Green energy will undoubtedly play an increasingly more important role in meeting the country’s energy demands in the decades ahead. But third-party analyst projections anticipate that petroleum will still be critical to the U.S. for many more decades.

As a linchpin holding America’s economy together, the company has been able to raise its distribution paid to unitholders for 21 years straight. Magellan is forecasting that its distribution coverage ratio will come in at 1.25 in 2022, which builds a margin of safety into its 8.6% distribution yield.

— Kody Kester

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Source: The Motley Fool