Investing in dividend stocks can be a great way to generate passive income. However, income investing isn’t always as easy as it sounds. Companies can cut, cancel, or suspend their dividend payouts at any time. So it pays to be selective when picking shares for passive income.
Here, I’m going to highlight three UK dividend stocks I’d buy for passive income. All three companies have excellent long-term dividend track records and offer attractive yields at present.
Dividend stocks for passive income
One of my top stock picks for passive income is consumer goods giant Unilever (LSE: ULVR), which owns a number of well known brands including Dove and Domestos. It has consistently grown its dividend over the last 50 years and currently offers a prospective yield of around 3.6%.
Unilever shares are a little out of favour right now, due to the fact the company is facing higher costs. These higher costs could negatively impact profits in the near term. However, I expect the group to overcome this challenge as it should be able to pass on some price rises to consumers. So I see the share price weakness as an opportunity.
In the long run, Unilever looks well-placed to benefit from the growth of the emerging markets. It also looks set to benefit from the growth of industries, such as plant-based meat and nutritional supplements. As it grows, I’d expect dividends to keep rising.
Nice yield
Another stock I’d buy for passive income is BAE Systems (LSE: BA). It’s a leading defence and security company with a solid dividend track record. The prospective yield here is currently around 4.4%.
While the FTSE 100 index is back near pre-Covid-19 levels, BAE Systems shares are still well below their February 2020 highs. One reason for this is that investors are concerned about defence budget cuts. I think this underperformance has thrown up a buying opportunity. With China currently sabre-rattling, I don’t think we’re likely to see cuts any time soon.
Of course, if I’m wrong and major governments do cut their defence budgets, BAE Systems could be impacted negatively. This could put the company’s dividend growth track record at risk.
However, dividend coverage (the ratio of earnings to dividends) is decent here, so I think the chances of a cut in the near term are low.
Share price gains and dividends
Finally, I’d buy shares in Smith & Nephew (LSE: SN) for passive income. It’s a medical technology company that’s paid a dividend on its ordinary shares every single year since 1937. The yield here is around 2%.
Some dividend investors may be put off by Smith & Nephew’s lower yield. I’m not. That’s because I think SN has the potential to provide healthy total returns (capital gains plus dividends) in the medium to long term.
In the medium term, profits should get a boost as hospitals move to address the huge surgery backlogs that have built up over the pandemic. Meanwhile, in the long run, the company should benefit from the world’s ageing population, which is set to increase demand for healthcare.
There are risks here, of course. For example, if Covid-19 hospitalisation rates spike again, my medium-term investment thesis could be wiped out.
Overall though, I think the risk/reward skew here is attractive. I’d buy Smith & Nephew as a great stock for passive income.
