There’s no finer form of passive income than dividend-paying stocks, in my opinion. What’s more, re-investing this money back into the market has the potential to generate a sizeable nest egg for me over the long term.
With this in mind, here are three potential candidates I’d consider buying.
As ideas for passive income go, it’s hard to ignore Rio Tinto (LSE: RIO). The mining and metals company is now one of the biggest in the world. Among other things, it produces iron ore for steel, aluminium for smartphones and copper for electric cars. I somehow doubt demand is going to plummet anytime soon. Indeed, many in the market believe we’re at the start of a commodities ‘supercycle’.
This should be good news for the dividend stream. At the moment, Rio is forecast to yield almost 9.2%. Put another way, I’d receive £92 for every £1,000 I invest in the current year. That’s a staggering return considering the best Cash ISA generates a paltry 0.6%.
Obviously, nothing’s guaranteed. We learned as much last year as companies temporarily paused payouts as the pandemic took hold. Moreover, investing in a miner can often be a rollercoaster ride as volatile commodity prices dictate performance. So long as I’m comfortable with all this, the FTSE 100 member presents as an excellent pick.
It may be about to reduce its dividend significantly but I still reckon that pharmaceutical giant GlaxoSmithKline (LSE: GSK) remains a great option for me if I were looking for passive income. The company is expected to return 55p next year, which is a yield of 3.7% at the current share price. At 45p from 2023, the payout for New GSK will be even lower.
Naturally, I’d always prefer distributions to be rising. However, I don’t believe it’s controversial to say that healthcare is one of the most defensive sectors around. In this way, Glaxo helps to balance out other, more volatile holdings. Moreover, the new dividends will be better covered by profits. Assuming earnings will grow over time, GSK can then start hiking payouts again.
Sure, GlaxoSmithKline is unlikely to get a speeding ticket in terms of performance. In fact, the share price is still 7% below where it stood five years ago! So, for me, the biggest risk here comes from not investing elsewhere and potentially making more money.
A final idea is Aviva (LSE: AV). The insurance giant’s share price has recovered well from the coronavirus sell-off. However, I’d buy this stock for passive income more than anything.
This FTSE 100 constituent will return 22p per share for the whole year, at least according to analysts. That becomes a 5.2% yield at the current share price. Thanks to recent great trading, returns like this also appear sustainable.
That said, I don’t pretend there aren’t drawbacks to investing in Aviva. Thanks to its clout in the financial world, the performance of the stock will inevitably be linked to the health of the UK economy. One might argue that it’s far less risky to buy an index-tracking fund and generate passive income this way.
That plan has merit. However, I think the difference between the FTSE 100 yield (3.4%) and Aviva’s payouts is sufficiently large to warrant buying the latter. It’s also worth highlighting that Aviva will return £4bn in extra cash to owners by June 2022.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.