My top passive income shares to buy

Rupert Hargreaves explains why he thinks these are the best shares to buy for a passive income portfolio of equity investments.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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I believe owning equities is one of the most straightforward ways I can earn a passive income. However, I’m not willing to buy just any old income stock. With that in mind, here are my top passive income shares to buy, which I’d acquire for my portfolio today. 

Passive income champions

When it comes to dividend income, I think British American Tobacco is one of the best income stocks in the FTSE 100. Due to the ethical considerations of smoking, some investors might not want to own this company. That’s understandable.

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Nevertheless, I’d buy the stock for its 8% dividend yield and robust cash generation. The group is launching new products to capitalise on the boom in e-cigarettes and so-called reduced-risk products. I think these will help underpin its growth as we advance. 

I believe any passive income portfolio should contain a selection of property stocks. Real estate investment trusts can provide diversification as well as a steady income stream. 

I think some of the best shares to buy in the sector are LXI REIT, which specialises in letting property to institutional tenants on long leases. I’d also buy the stock for its 3.8% dividend yield.

Another stock I’d acquire is Warehouse REIT, which invests in distribution centres across the country. With the demand for these facilities booming due to the growth of the e-commerce market, I think the enterprise has significant potential. The stock also offers a 3.9% dividend yield, at the time of writing. 

One challenge these passive income stocks may face is higher interest rates, which could negatively impact property values and push-up interest costs. 

Shares to buy for income and growth 

Another bucket of businesses I’d like to include in my passive income portfolio is utilities. Companies like United Utilities are highly defensive because they supply an essential service to consumers, water in this case.

They also own infrastructure that’s likely to be almost impossible to rebuild today, assets such as pipelines and reservoirs. This gives them another competitive advantage

One drawback of owning stocks like United is the fact that the utility sector is highly regulated. If regulators decide to clamp down and demand companies reduce profit margins, it could have a big impact on their dividends. 

Despite this risk, I’d also buy United for its 4.3% dividend yield. 

The final company is the wealth management group Schroders. This is an income and growth stock. With a dividend yield of 3.2% and growing profits, I think this is one of the best shares to buy for income and dividend growth potential. As earnings expand, management should be able to hike the payout to investors. 

Still, this growth isn’t guaranteed. Risks the firm may face include competition and additional costs, which could harm profit margins. 

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Rupert Hargreaves owns shares of British American Tobacco. The Motley Fool UK has recommended British American Tobacco, Schroders (Non-Voting), and Warehouse REIT. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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