My secret weapon for building passive income

Worried about companies cutting their dividend payments? Our writer has a secret weapon that he’s using to keep the passive income stream flowing.

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Key Points

  • Preferred stock in BP and Aviva continued to maintain their dividends even when the common stocks decreased theirs
  • Preferred stocks pay fixed dividends that have to be paid before dividends can be paid to common stockholders
  • At current prices, BP preferred stock has a yield of 5% and Aviva preferred stock has a yield of 6%

Passive income

Stocks that pay dividends can be a great way of generating passive income for me as an investor. But dividend stocks can be risky investments.

Sometimes, companies can decide to reduce the amount they distribute to investors, or even stop paying dividends entirely. And when they do, not only does the passive income stream dry up, but the price of their shares can crash as a result. 

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

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With stagflation and the possibility of a recession approaching, I’m increasingly wary that there are going to be more and more companies lowering or suspending their dividend payments. When economic conditions get difficult, businesses might need to keep their cash to survive. Alternatively, they might use it to fund growth opportunities as their rivals struggle. Either could lead to lower payouts.

Fortunately for me, I have a secret weapon that I’m using in my bid to build passive income.

Preferred stocks

In order to generate passive income that I can rely on when times are tough, I’m looking at buying preferred stock. Like common stocks, preferred stocks pay dividends to their owners. But unlike common stocks, management doesn’t have the same discretion over how much to pay out each year. 

Two examples of companies that have preferred stocks that I can buy are BP (LSE:BP) and Aviva (LSE:AV). Both companies increased their dividends in 2018 and again in 2019 before lowering them substantially in 2020.

If I owned the common shares in these companies, then I’d have received good dividends before the pandemic. But when I needed it most–in the difficult economic times, my passive income would have deserted me.

By contrast, if I owned the preferred stock in each of these companies, my stream of dividend payments would have continued uninterrupted. BP’s 9% preferred stock distributed a 4.5p dividend to its shareholders twice per year. Aviva’s preferred stock distributed two payments of 4.375p each. 

This is because preferred stock dividends are fixed. Take BP as an example. The preferred stock dividend isn’t raised when the company makes more money due to high oil prices are high, but it also isn’t lowered when the price of oil falls.

While management can decide not to pay a dividend at all in a particular year, the missed payments accumulate and have to be made in full before any dividends can be paid to common stockholders. That means that, sooner or later, I can expect to get the dividend payments I usually get.

Conclusion

I’m looking at buying preferred stock in both BP and Aviva for my passive income portfolio. At current prices, BP stock pays a 5% dividend and Aviva’s preferred stock has a dividend yield of around 6%. In both cases, this is attractive to me.

While preferred stock dividends have limited upside, they’re also less likely than common stocks to let me down in a difficult economic environment. That’s why they’re my secret weapon for building passive income.

Inflation Is Coming: 3 Shares To Try And Hedge Against Rising Prices

Make no mistake… inflation is coming.

Some people are running scared, but there’s one thing we believe we should avoid doing at all costs when inflation hits… and that’s doing nothing.

Money that just sits in the bank can often lose value each and every year. But to savvy savers and investors, where to consider putting their money is the million-dollar question.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation…

…because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

Stephen Wright has no position in any of the shares mentioned. 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.

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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