With much uncertainty about a second Covid-19 outbreak worldwide, investors are nervous about the increased choppiness in share prices. There may still a bumpy road ahead for market participants for the rest of the year. However, passive income shares can deliver results over the long run, especially if you are saving for your retirement years.
Therefore, today I’d like to discuss how investing in dividend-paying blue-chip stocks in the FTSE 100 may help your portfolio to weather an economic downturn. Such shares typically have solid financials, stable cash flows, brands that are recognised by consumers worldwide and proven managerial track records. Let’s take a closer look.
Dividends mean passive income
Both in the UK and worldwide, interest rates are at a record low. Generating passive income via dividend stocks becomes especially attractive in such a macroeconomic environment. And regular investing in dividend shares enables investors to create serious wealth over the long term.
With passive income-yielding businesses, investors get the potential to have both capital gains and residual payouts to bolster their position. During market downturns, dividends can also help investors ride out the storm better. Although the current volatility in the markets may be unnerving, most stocks are a lot cheaper than they were at the start of the year. So how do you decide where to invest?
Defensive stocks may be a safe bet
Each portfolio has a different investment style and risk/return profile. When equity markets become choppy, many investors go for defensive stocks. Such businesses tend to be less prone to macroeconomic and credit cycles than others. And the FTSE 100 offers a number of names that could be appropriate for most portfolios.
If you love stable dividend shares, then a utility group like Severn Trent deserves your attention. As one of the largest water companies, it serves over eight million customers.
Needless to say, demand for services like water and electricity is eternal, whatever the economic reality. So far this year, the stock price is down about 6.5%, hovering at 2,379p. That means a dividend yield of 4.2%. The shares are expected to go ex-dividend next in September.
My second pick is international defence group BAE Systems. Year-to-date, this FTSE 100 bellwether is down about 15%. The current price of 475p supports a dividend yield of 4.9%. The shares are expected to go ex-dividend next in October. Deutsche Bank has a price target of 675p on the stock.
Management will release half-year results on July 30. Earlier in June, it provided an update when it said it expects sales to be “broadly stable year-on-year”. Nonetheless, profit over the first six months of 2020 is likely to be around 15% lower. I’d look to buy the dips.
Reinvesting dividends to secure your retirement
If you invest £10,000 in total in these two companies, you can generate over £800 in annual dividends. And that is on top of any potential increase in share price. While it is tempting to take out this passive income yearly and spend it, I’d argue that it is important to reinvest dividends and delay withdrawals.
You may also consider investing in dividend shares via Exchange Traded Funds (ETFs). An example would be the iShares UK Dividend UCITS ETF, which is a basket of the 50 highest-yielding stocks from the FTSE 350 Index.
