Dividend income can be classified as passive in nature as I don’t need to do much to receive the payment. Once I’m a listed shareholder, I’ll automatically receive the dividend payments into my nominated account. The part that isn’t passive about this investment idea is that I first need to choose the stocks to invest in.
Picking stocks for reliable passive dividend income
In order to choose my best stocks for passive dividend income, I need to know what I’m looking for. To make my future life as easy as possible, I want companies that are going to pay me a reliable dividend going forward. I don’t want to invest in a company only to find that next year the dividend gets cut. I’d then have to sell the stock, do some more homework and reallocate my money.
I can’t predict the future like that, but I can pick stocks that have a good track record and strong financials. In this way, it should help me reduce the probability of losing income in the future.
To this end, I’d look for stocks that didn’t cut the dividend recently during the pandemic. If a company has been able to pay out passive dividends income even with the economic climate, it bodes well for me.
In addition, I’d look at the company to see what dividend cover it has. This measures how much of the dividend paid out can be covered by the latest earnings. A figure above 1 is a must for me, showing that earnings can completely cover the dividend.
Specific stocks I like
Now that I’ve got my head in a better position, I can start to look for specific names. When looking for a strong track record, Phoenix Group and M&G come to mind.
Phoenix Group specialises in insurance, whereas M&G is more active in investment management. The nature of the industry means that upfront fees or monthly charges are in place for the services or products offered. In part, this helps to generate high levels of cash flow for the businesses.
The cash generation helps support dividend payouts. Phoenix Group has either maintained or increased the dividend per share for each of the past 10 years, as noted in the 2020 annual report. M&G has offered a generous dividend since its demerger from Prudential in late 2019. Before that, Prudential itself had paid out a dividend for several years prior.
Both stocks do carry risks. Phoenix Group could see higher claims going forward as people get back to normal life. M&G is also vulnerable to another stock market crash like last year, with investors pulling their funds out.
Another stock I like for passive dividend income is Severn Trent. The water utility company might only have a dividend yield just above the FTSE 100 average at 3.6%, but it’s a consistent payer. For the past decade, the yield hasn’t dropped below 3% and has been above 4.5% for periods.
It isn’t going to offer me yields in excess of 7% that the two financial stocks currently do. Yet I feel this is a low-risk idea, given the mature sector it operates in. Yet a risk is that tighter regulation could hamper future growth potential.
Overall, I’m considering buying all three stocks now for passive dividend income, as some of my favourites from the FTSE 100 index.
