5 ‘no-brainer’ dividend shares for a passive income in 2022

Dividend shares can be a great way to earn passive income. Harshil Patel considers five high-yielding stocks he’d consider for 2022.

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.

2022 new year concept image

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Dividend shares can be a great way to produce passive income. I own several myself and each provide a reasonable semi-regular income. The UK is home to some excellent dividend shares, in my opinion. In particular, the FTSE 100 includes several companies that offer dividend yields of over 5%.

If I invested £10,000 in a selection of these shares in 2022, I could end the year with an extra £500 of dividends. Passive income from shares isn’t just about the dividend yield though. Over time, I’d hope for the value of the shares to grow too. If my selection of shares can grow in value by just 5% a year, I’d be looking at 10% in total, including dividends. That’s around the long run total return for the FTSE All-Share index looking back over the past 35 years.

The power of reinvesting dividends

To gain an even larger passive income, I’d want to start with a larger sum of money. But that’s not always possible. Alternatively, I’d try to reinvest my dividends over time to grow my pot. Reinvesting dividends is a powerful way of making my money work harder. It works by using every dividend payment to automatically purchase new shares. Over time, I’d build up plenty of shares purchased just from dividends and each of these shares would in turn pay dividends, thus amplifying the effect.

Here’s an example. Let’s say I invest £10,000 in quality shares that yield 5% and the dividends grow at 5% per year. Let’s also assume the share price climbs by 5% per year and I’m investing for 25 years.

Using these assumptions, I calculate that my total pot without reinvesting dividends would total almost £59,000. Over 25 years, it should have paid out around £25,000 in dividends. This doesn’t sound too bad to me. But now consider this. By reinvesting my dividends over the same timeframe, I’d potentially own a total pot worth almost £115,000. That’s almost double. Also, it would have paid around £54,000 in dividends over that time.

That’s a considerable difference and it shows I could achieve a much greater passive income if I invest for a long period of time and reinvest my dividends.

Top 5 passive income shares

But what if I don’t have that long and want a passive income in 2022? I’d look for the best high-yielding shares right now. My list of ‘no-brainer’ dividend shares I’d consider includes Ferrexpo, Evraz, Rio Tinto, BHP group and Persimmon.

On average, these five shares currently yield around 8%. That’s far above the average FTSE 100 dividend yield of 3.5%. That sounds great, but I wouldn’t just look at the dividend yield in isolation. There are several other factors I’d want to consider. For instance, are they regular dividend payers? Yes, they are. On average, they’ve been paying regular dividends for 12 years. I prefer dividends to be affordable too. And that appears to be the case here. On average, dividends are well-covered by earnings.

A word of warning, however. Earnings can fall and occasionally companies can decide to suspend or cut dividends. Also, many of the shares in this group operate in the mining sector. This concentration of stocks could be a risk if the whole sector comes under pressure.

Overall, I reckon the pros outweighs the cons though, and I’d be happy to consider these shares for passive income for my portfolio in 2022.

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.

Harshil Patel owns Persimmon. 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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »