5 hot passive income ideas for 2022

Christopher Ruane shares five of his top passive income ideas for 2022 among UK dividend shares he would consider adding to his portfolio today.

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Like many investors, I have been grateful for the passive income I received in 2021. Much of that came in the shape of payouts from dividend shares. Some of the passive income ideas for 2022 I plan to use are also dividend shares. Here are five I would consider buying for my portfolio.

Tobacco focus: Imperial Brands

With a portfolio of tobacco brands including Lambert & Butler and Gauloises, Imperial Brands (LSE: IMB) is able to appeal to customers in a wide variety of markets. It can target smokers willing to pay a premium for their puffs, as well as more price-conscious purchasers. That all translates into sizeable cash flows that can help support the company’s dividend.

Currently, Imperial shares yield 8.6%. So if I put in £1,000 now, I’d expect to get around £86 of passive income in 2022. Indeed, Imperial’s next payout is scheduled for this week, although I’d be too late to receive that if I bought the shares today. But with another one due just three months from now, buying Imperial today could hopefully boost my passive income streams from the first quarter of 2022 onwards.

But there are risks with Imperial Brands. Primary among these is the company’s large exposure to the cigarette business. Falling consumer demand in many markets and tighter government regulation could hurt both revenues and profits in years to come.

Iconic insurer: Direct Line

Another company with a juicy dividend yield is insurer Direct Line (LSE: DLG). Its shares are currently yielding 8%.

The company has a well-known brand, which helps it attract and retain customers. I see that as a positive asset for the business, as it could help it control its costs over the long term if it reduces customer acquisition expense. On top of that, I like the company’s focus on fairly stable areas such as motor and home insurance. While cost competition can sometimes damage profit margins in this market, demand is fairly consistent. From year to year, payout costs shouldn’t vary dramatically, unlike in some parts of the insurance market. That should be good for the company’s economics.

One thing that is interesting about Direct Line, though, is its price. Despite the juicy yield, the Direct Line share price has lost 11% over the past year, as of the time of writing this article earlier today. I wonder if that reflects growing concern about the impact new rules around insurance renewal prices could have on the profits of companies such as Direct Line? If the rules squeeze insurance pricing as feared, they could lead to lower profits.

Financial services powerhouse: M&G

Another company I would choose in financial services, although a different part of the sector to Direct Line, is asset manager M&G (LSE: MNG).

The company’s yield of 9.1% is among the highest available right now from any FTSE 100 stock. The company has also said it plans to maintain or raise its dividend in future. That is not guaranteed, but if it happens, then buying M&G for my portfolio today could mean I lock in almost a double-digit yield.

I think the company’s business area is attractive. Huge amounts of money get invested by clients, so it is a big market. Given the size of the funds involved, even a modest commission in percentage terms can translate to sizeable revenues and profits. One risk is any slide in investment performance. If M&G funds don’t perform well, customers could move funds elsewhere, hurting revenues and profits.

Consumer goods giant: Unilever

It hasn’t been a great year for consumer goods company Unilever (LSE: ULVR). Its shares have drifted down 10% over the past 12 months.

That could be good news for me as a yield hunter though. A lower share price equates to a higher dividend yield, especially as the owner of Dove and Marmite has continued to raise its dividend. Currently, Unilever shares yield 3.7%. The basic characteristics of the business lend themselves well to large cash generation. Unilever sells products used by several billion customers each day. The company’s premium brands give it pricing power. This means that even in economic downturns, Unilever ought to be able to keep sales revenues substantial and maintain attractive profit margins.

One risk to profit margins currently, which the company highlighted this year, is ingredient cost inflation. This has been rampant and if Unilever can’t pass it on to consumers in the form of higher prices, profit margins could suffer.

But I see the recent weak performance of Unilever shares as an opportunity to add a blue-chip company to my portfolio at an attractive price. On top of that, the yield could help boost my passive income streams.

Investment trust: Income and Growth VCT

When looking at some 10%+ yielders last month, one of the names I considered was the venture capital trust Income and Growth (LSE: IGV). Since then, the trust has declared a 4p interim dividend, which is due to be paid next week.

That will take the trust’s dividend payments for the year so far to 9p. That’s almost 10% of the current Income and Growth share price – and there could still be further dividends declared this year.

I am not surprised, as the company has a track record of making successful investments in small companies that allow it to reward its own shareholders with juicy dividends. But this approach entails risks too. Such companies tend to be illiquid, so the timing and size of the trust’s income can be volatile. That also means dividends can move around a lot. Last year, for example, the payout of 14p was well over double the 6p paid in the previous year. Still, with those sorts of dividends, IGV is among the top passive income ideas for 2022 I would consider for my portfolio.

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 assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands and Unilever. 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.

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