The idea of passive income is appealing. Investing in shares strikes me as being one of the best ways to achieve a good passive income. Why? Partly because it reduces the costs associated with buying and selling frequently and the related need to constantly make the right decisions. I think these two FTSE 100 shares are ideal sustainable income providers for my portfolio.
Steady as she goes
I think BAE Systems (LSE: BAE) is an ideal FTSE 100 share for generating passive income. It has a yield of over 4%, which is more than twice covered by earnings so is in little of danger of being cut. The defence group also has a strong history of increasing its dividend.
On top of that, it has high barriers to entry given the investment needed to become an international defence group, with a further moat added by the depth of its government relationships in the UK, the US, and around the world.
In my mind, all this combines to make it an ideal passive income stock. The potential downside is that capital growth may be limited given this is a pretty slow growing industry, potentially at risk of post-pandemic government defence budget cuts.
Technological change such as 3D printing may also hit the business model in the future. It could reduce manufacturing costs. But overall, BAE Systems is a steady company. That’s why I am tempted to add a position given its income producing qualities.
A big passive income provider
Legal & General (LSE: LGEN) shares yield over 6% and have been rising through the last decade. That’s a strong indicator that management prioritises the shareholder reward and that the business model creates enough profit even in difficult markets for a dividend to be paid.
The dividend cover is a little below twice earnings, but isn’t so low that a cut is likely any time soon. Also, Legal & General seems very well poised to benefit from an ageing population with its annuities and retirement business.
Legal & General has huge scale in what can at times be quite a low margin business. It now manages well over £1trn of wealth for more than 10m customers.
Any big issues with the UK economy are likely to hit Legal & General hard given its share price often reflects sentiment about the UK economy. There’s also the risk that its investments do not provide the returns expected, which could drag the share price down.
However, on a price-to-earnings growth ratio of 0.7 the shares look cheap. That combined with the income the dividend provides, really makes it one of the best FTSE 100 shares in my eyes.
Overall, I think the Legal & General share price is nearing highs but I’d be very happy to buy more if the share price falls back to under 250p. For me at that level they would be a steal and as an added bonus the yield would be even higher. At the current price, I still think the high yield and dividend cover means it’s a top passive income stock.
BAE Systems and Legal & General are two ideal FTSE 100 shares for generating passive income in my portfolio.
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Andy Ross owns shares in Legal & General. The Motley Fool UK has no position in any of the shares mentioned. 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.