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My top 10 income stock picks for 2015

Scores of investors have been caught out over the last year chasing high-yielding stocks that, in the end, were too good to be true. Examples include companies like Codan Limited (ASX: CDA) and a host of mining services companies that have seen massive share price falls, boosting their trailing dividend yield and luring in those looking for big returns.

#1 Rule to Income Investing

If you’re going to invest a large portion of your portfolio in income-producing stocks, you must consider the sustainability of the income. I have chosen the following 10 stocks based on 1) the sustainability of earnings and thus dividend, and 2) their yield. The reason for this is that there’s no point getting a yield of 7% this year if it will drop to 2% next year!

10 Top Income Stocks

Large Caps

Company 2015 Yield (Est) 2016 Yield (Est)
Telstra Corporation Ltd (ASX: TLS) 5.4% 5.6%
Insurance Australia Group Limited (ASX: IAG) 5.4% 5.6%
Wesfarmers Ltd (ASX: WES) 5.3% 5.4%

Mid Caps

Company 2015 Yield (Est) 2016 Yield (Est)
IOOF Holdings Ltd (ASX: IFL) 6.1% 6.8%
Henderson Group plc (ASX: HGG) 4.4% 4.9%
Breville Group Ltd (ASX: BRG) 4.7% 5.3%
JB Hi-Fi Limited (ASX: JBH) 5.3% 5.4%

Small Caps

Company 2015 Yield (Est) 2016 Yield (Est)
Hills Ltd (ASX: HIL) 7.4% 8.3%
Mortgage Choice Limited (ASX: MOC) 6.8% 7.5%
Nick Scali Limited (ASX: NCK) 5.2% 5.7%

Foolish investors will note that the large caps have been great dividend stocks for a long time, while the mid and small caps have a shorter history of reliable payouts. Over time these companies could turn into the new income investor favourites, certainly there could be massive yields on offer in the years ahead.

Risks

The biggest risk to the companies above is a prolonged period of sub-par economic growth in Australia. This will impact retail sales, mortgage growth, income growth and restrain discretionary spending.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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