Shares that can produce a passive income strike me as key to helping me grow the value of my investment portfolio.
With that in mind, these are my two dividend heroes – the shares I think can provide a growing passive income in my Stocks and Shares ISA.
A FTSE 100 share for passive income
Legal & General (LSE: LGEN), which has just gone ex-dividend this week, is one of the biggest dividend payers on the FTSE 100. It has a dividend yield of over 6%.
The dividend for me is a major attraction. As well as being high-yielding, the dividend has also grown. It has gone from 14.35p in 2016 to 17.57 in 2020, while other insurers cut their dividends because of the pandemic.
Alongside that, there is balance sheet strength, profitability, and growth opportunities in the US and Asia. Legal & General, through its annuities business and investing, is also tapping into long-term trends around climate change, the need for high-quality housing, and an ageing population.
When it comes to risks, the company as an investor is reliant on the markets – both equities and bonds. A collapse in either could be damaging for Legal & General as an insurer and investor. The company itself notes that it holds a significant portfolio of corporate bonds to back its pension risk transfer and annuities business.
The pricing of long-term life insurance business requires the group to make assumptions about future trends in life expectancy. That creates a risk — if customers live longer than assumed in the models, it will require an increase in reserves and reduce Legal & General’s profits.
Despite these risks, Legal & General strikes me as being a share that can deliver long-term growing passive income, which is why I like the insurer.
A housebuilder with a high dividend yield
Another share I like for passive income is FTSE 100 housebuilder Persimmon (LSE: PSN). Persimmon has declared a full-year dividend of 110p per share, less than half the 235p it paid for 2019.
On a brighter note, it said it was committed to a total payout of 235p per share in 2021. Based on the current share price that works out as a dividend yield of around 7.3%. It’s the increase in the dividend that gives me confidence in Persimmon is a good passive income share. The cash on the balance sheet of £1.2bn can also help the housebuilder pay the dividend.
Operationally I think it’s one of the strongest UK housebuilders. It had around 127,000 plots at the end of 2020, indicating plenty of land on which it can build for years to come. Many of its customers are first-time buyers meaning it can benefit from government support for the sector, which tries to help this group the most.
The downsides are the possibility government might withdraw support from the sector, which would cause a major slump in demand. There’s the possibility of costs going up which would hit margins and has happened in the not too distant past. There may also be ongoing reputational damage from its past building quality issues.
To recap, I think Legal & General and Persimmon are both dividend heroes. Both seem to be shares that can help me benefit from compounding and create a passive income that can help me achieve my financial goals through their large dividend payments.
