Passive income is the holy grail of investing for many people like myself. If I don’t need it, I can reinvest it. But if I do, it’s a second income stream to fund my life.
So let’s take a look at why I think now might be a once-in-a-lifetime opportunity to build a supercharged passive income portfolio.
FTSE correction
The FTSE 100 might be pushing towards 7,500, but many sectors are down. The index is being hauled upwards by surging oil and resources stocks. Sectors such as retail, housebuilding, banking and travel are still trading at considerable discounts.
It’s also worth noting that the lead index has a disproportionate number of resource and oil stocks on it. And Shell — the biggest company on its list by market-cap — is up 44% over the year. Around £75bn has been added to its share price over the period.
Meanwhile, stocks in the housebuilding sector are down around 40% over 12 months, on average. Housing giant Persimmon has had a whopping 53% wiped off the value of its share price.
This doesn’t happen everyday. In fact, it doesn’t happen all that often at all. And, as a long-term investor, I want to take advantage now as I might not get the chance to buy stocks at such a discount for a while. And by then, I could be looking to drawdown on my investments. That’s why I see this as a once-in-a-lifetime opportunity for me.
Falling share prices, rising dividends
When share prices fall, dividend yields go up. And as someone who invests in dividend stocks, now presents me with a unique opportunity to supercharge my passive income generation.
It’s also important to remember that the dividend yield is always relevant to the share price I pay for the stock. So even if the share price goes up after I’ve bought the stock, my yield will remain frozen unless the dividend payment is upped, or cut.
Right now, I’m looking at dividend stocks that are trading at discounts. And that’s because yields are sizeable. In the long run, when the market recovers, I can still receive these inflated dividend yields.
My top picks
I’m starting with banks, and these can be some of the safest stocks to buy. They’re not known for their big dividends but, at this moment in time, share prices are down and yields are inflated.
For example, Lloyds is down 24% over three years and 8% over one year. And this has pushed the dividend yield up to 4.4%. I appreciate that might not seem that big. But the coverage ratio is healthy — 3.75 last year — and investors are hoping to see the dividend payments upped towards pre-pandemic levels in the coming years.
Another stock in Legal & General. It’s down 13% over the year and now offers a 8% dividend yield. In 2021, the coverage ratio was 1.85. That’s solid enough.
Both these companies can be net beneficiaries of rising interest rates in the near term too. I’d also argue that both are meaningfully undervalued, although I appreciate that the economic situation won’t be good for credit quality. I recently bought more of both these stocks for my portfolio.
