Passive income has long been a investor goal and a whole new generation is targeting it today. But so many of the side hustles young people go for are far from passive. For me, the best way of generating truly passive income is by collecting dividends from high-yield stocks.
One downside of high-yield dividend stocks is that they don’t tend to rise quickly in value. That’s because instead of using profits to accelerate growth, they reward shareholders with those profits in cash.
While I’ve recently been worried about a stock market crash, I’m still going to invest in stocks I think are good buys now. And by spreading my investment over four different sectors, I’m reducing my risk through diversification.
Tobacco giant
Imperial Brands is the world’s fourth-largest tobacco company. UK smokers will know its brands, Rizla and Golden Virginia. With a current share price of 1,527p, the company has a market cap of £14.5bn. And with a whopping 9% dividend yield and a price-to-earnings (P/E) ratio of only 5.3, the company is my first pick to start generating passive income. Its customers will always want cigarettes, regardless of economic uncertainty. However it does have a high level of debt, as well as the risk of increasing legislative restrictions on its products.
Mining king’s passive income
Evraz is a steel manufacturing and mining company. Its share price has rocketed 85% to 585p as a result of the increase in demand for steel during the pandemic. At 585p per share and with a price-to-earnings (P/E) ratio of around 8, I think the dividend should be sustainable in the short term. However, as supply chain issues subside and competitors ramp up steel production, its share price and dividend yield could fall over time.
Financial services
Legal & General is a financial services company with over 10m customers on its books. Its recent H2 earnings report was broadly positive, with a 14% increase in profits. With a share price of 274p and a price-to-earnings (P/E) ratio of around 8, it has a current dividend yield of nearly 7%. Its dividend going forward also seems likely to benefit from the growing pensions industry. One key risk for the stock is the volatility of its share price. And in the event of a market crash, it could lose some customers.
Passive income from a telecoms titan
Vodafone (LSE: VOD) is a one of the largest mobile phone companies in the world, with nearly 150m customers in 2021. This market position makes it a good defensive bet if there’s a downturn. With a share price of 118p and a market cap of £32.8bn, it’s also one of the largest companies in the FTSE 100. The 6% dividend stock could even increase as the company rolls out a profitable 5G service across its international markets. However, growth could be restricted by debt and high competition in the telecoms space.
What I like about these four stocks, other than the passive income, is their inbuilt defensive nature. Even if there’s an economic downturn, people will always want tobacco, steel, financial services and mobile phones. This gives me the confidence to keep hold of these companies, even if there’s a short-term dip. I think if the fundamentals are good, my passive income should be safe.
