Generating a steady stream of passive income is the ultimate goal for many investors. Sitting back and reaping the profits while others manage the business I’m invested in? Yes, please.
If only it were as easy as that. My colleague Jonathan Smith worked out how much capital you would need to start generating a passive income of £1,000 per month. Spoiler alert — around £166,666 invested in certain dividend stocks would do the trick. While that is a figure to aspire to, I’d be happy with a smaller amount every month to supplement my other income streams.
One way I would do that is to buy a handful of FTSE 100 shares with generous dividend yields. Dividends are payouts given to shareholders in a company when the company is doing well and profits are strong.
Two FTSE 100 companies I think could provide passive income in the long term are Aviva (LSE:AV) and British American Tobacco (LSE:BATS).
Strong yield
Insurance giant Aviva is a dividend stock I like that has room to grow this year. The company has one of the highest yields in the FTSE 100 currently. If I bought at the current share price of 360p, the yield stands at 7.5%.
With a price-to-earnings (P/E) ratio of 5.68, the Aviva share price seems to be on the cheaper side of the Footsie. Of course, if the share price were to stall or lose value while I hold the investment, then the yield would be redundant.
Aviva shares have dropped around 11% in the last year. That may sound ominous, but that is broadly in line with the FTSE 100 index as a whole, which has fallen 10%.
So far, investors appear pleased with new CEO Amanda Blanc. Blanc is working to make the business more efficient its core markets of UK, Ireland, and Canada.
I’m backing the company to return its share price to growth this year. As a result I would add Aviva to my portfolio for the passive income it could generate through its dividend yield.
Changing business
Another company I’d consider adding to my portfolio for passive income is British American Tobacco. As the name suggests, tobacco products remain their key brands. However, the company has recognised the need to move towards newer products due to the health risks associated with cigarettes.
The company’s revenues have not been impacted by Covid-19 as much as had previously been expected. With its quarterly earnings report and forecasts to be released Wednesday, analysts have projected organic topline revenue growth of 6.7% in 2021.
At its current share price of 2630p, British American Tobacco shares return a dividend yield of more than 8%. An attractive prospect for income investors.
There is risk involved in buying shares of the company, however. Not least is the move towards a more health-conscious population, which is increasingly shunning cigarettes. More investors than ever now focus on ethical investing. The company is unlikely to make it into these portfolios any time soon.
For now though, the projected revenue growth and 8% dividend yield mean I would add British American Tobacco to my passive income portfolio.
