How I would build passive income through dividend shares in 2022

Building a passive income is a top goal for many investors. These dividend shares can help develop my passive income portfolio for 2022.

| More on:

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.

One English pound placed on a graph to represent an economic down turn

Image source: Getty Images

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.

Passive income is a term thrown around a lot today. Many dream of having that extra cash flow through whilst they sleep. However, not everyone can afford to directly invest in real estate and properties. Luckily, dividend investing can be a very effective strategy for building passive income.

Many investors target dividend shares in order to create a stable and regular payout from their portfolio. With yields averaging 4.1% within the FTSE 100, a £1,000 investment would return an average £41 annually. Now, if I were to put this investment in BHP Group, a stock boasting an 11% figure, annual dividend returns would leap to £110. But income investment isn’t as simple as finding the highest figure.

A company issues dividends based on its free cash flow. This decision is routinely reviewed by management, meaning these returns are never guaranteed. Whilst high payouts may indicate strong financial performance, it may also be an unhealthy distribution of free cash from the company’s management. The strategy certainly has its risks. With this in mind, how am I approaching dividend-focused investing in 2022?

Dividend investing in 2022

The pandemic’s shock to corporate earnings across these last few years has subsequently impacted dividend yields. As disrupted markets have forced companies into rationed operations, payouts have largely withdrawn across the board. However, a few companies have paid consistent dividends throughout the pandemic. These are the stocks I would target to build my passive income portfolio.

First would be British American Tobacco. The manufacturer has consistently kept dividend yields at around 7% since 2018. The company’s increases in adjusted revenue and net cash across FY21 suggests financial resilience will continue throughout the pandemic. I am confident in its delivery of strong dividend figures throughout 2022.

I would also consider National Grid. The company’s dividend rate is noticeably lower at 4.63%. However, boasting undisrupted payouts throughout the pandemic, I have faith in this utilities company to also deliver consistent dividends throughout this year. Indeed, a 27% increase in cash generation seen in the FY21 report suggests a stable direction forward for this company.

The real-estate case

As said before, direct investment in real estate is a very expensive venture. However, investment in the real estate market is still accessible. I would also consider adding a real estate investment trust (REIT) such as Land Securities (LSE: LAND) to my passive income strategy.

This addition would diversify my portfolio by creating exposure to the real estate market. This is particularly important in 2022, as easing lockdown regulations may lead to higher property prices with companies returning to on-site work. Indeed, Land Securities currently holds a dividend of just under 4%. However, the trust’s net rental income margins increased by 25% across FY20-21. This suggests the dividend figure to be in a secure position as the value of the trust increases.

Dividend investment certainly has its risks. However, it can also be very rewarding, particularly with a diverse and considered portfolio. With investments in tobacco, utilities and real estate, I am confident that my passive income portfolio will continue to grow throughout 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.

Hamish Cassidy has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Landsec. 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

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

2 cheap dividend stocks I’d snap up in a heartbeat!

This Fool is on the look out for quality dividend stocks and earmarks these two firms as great options to…

Read more »