Which passive income shares give me the most bang for my buck?

One way to mitigate the damage done by inflation is to own high-yielding passive income shares. Paul Summers looks at the top payers in the FTSE 100.

Passive and Active: text from letters of the wooden alphabet on a green chalk board

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Inflation could hit 11% later this year. As such, it’s only natural that passive income shares — those that, in theory, should regularly deliver income to holders — are appealing at this point in time.

But which stocks generate the highest yields in the UK market? Well, here’s a selection of stocks from the FTSE 100 that immediately grab my attention due to the payouts on offer.

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Passive income shares with eye-popping yields

Generating near-inflation-beating income from FTSE 100 is not impossible so long as I’m comfortable investing in a handful of specific sectors.

Housebuilders Persimmon, Taylor Wimpey and Barratt Developments all offer dividend yields over 8%. In fact, the first of the three offers a barnstorming yield of over 13%.

Another set of big passive income shares can be found in the financial sector. Investment bankers M&G and Abrdn offer streams of near-10% and near-9% respectively. Life insurers Phoenix Group Holdings and Legal & General both come with dividend yields over 8%. Even if these aren’t sufficient to outpace inflation, they will help to take out a lot of the sting. Compare this to the best instant access Cash ISA on the market, which offers just 1.35% in interest. No thanks!

The highest of the high-yielding dividend stocks, however, can be found in the mining sector. One of my top picks for 2022 — Rio Tinto — is forecast to yield over 14%.

Guaranteed income? Unfortunately not

Given the above, it can be tempting for me to race to buy one of these stocks now, assuming I have the cash to do so. Unfortunately, it’s not quite that simple.

I like a passive income share as much as the next person. However, I’m also fully aware that these dividends can never be guaranteed. What followed as the UK government brought in the first lockdown in March 2020 is a testament to that. Concerned about what a global pandemic could do to their balance sheets, payments to shareholders at many companies were cut or suspended indefinitely.

Sector risk

Thankfully, Covid-19 has been dealt a blow thanks to the vaccines. Whether these prove to be the knockout punch in the West remains to be seen. As such, I’m wary of placing too much faith in any single stock to give me the passive income I’m looking for. While the pandemic will eventually pass completely, there are lots of other headwinds waiting in the wings.

Sentiment for housebuilder stocks might suffer if, thanks to the recession, the housing market slows dramatically. Bankers could see a reduction of inflows as the appetite to invest lessens. Profits at mining stocks (and consequently, dividends) are always determined by something they can’t control, namely volatile commodity prices. So yes, I can get a lot of bang for my buck with these passive income shares. But, my goodness, I’d need to go in with my eyes fully open.

Solution? Diversify!

Since we can’t know the future, one solution would be for me to buy a few of the above from different sectors. Diversifying my portfolio in this way should provide a safety net of sorts should one or two suffer earnings setbacks that increase the likelihood of a cut.

This strategy won’t remove all risk, but nothing will. And those yields are very tempting indeed.

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Paul Summers 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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