How I’d invest £1,000 in dividend stocks to start earning passive income in March

Stephen Wright is sticking to Warren Buffett’s principles about not losing money and investing in strong businesses. Which dividend stocks fit the bill?

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Key Points

  • Dividend stocks distribute their profits to shareholders
  • Diversification can help protect a portfolio against threats to specific companies or sectors
  • Owning businesses that will prove durable is crucial to long-term investment returns

Investing in dividend stocks can be great for investors. As the underlying businesses make money, shareholders benefit from occasional or regular cash payments.

I think that there are some good opportunities for investors looking to buy dividend shares at the moment. Here are two I’d buy with a spare £1,000.

Quality

First and foremost, I’d look to invest in high-quality companies. As an investor, when I buy shares, I’m looking to own them for a long time — 10, 20, or 30 years.

That means that the underlying business needs to be durable. If the only reason for buying a stock is just that it’s undervalued, then there’s no reason to keep it once the price recovers.

If the company is a strong business that can keep generating cash, though, there’s a reason to keep holding it as it continues to generate a return.

A good example is Hargreaves Lansdown. With a dividend of nearly 5% and trading at a price-to-earnings (P/E) ratio of 15, the stock looks underpriced.

I’m concerned, though, that the company’s business model might prove untenable in the long run. The rise of commission-free investing has, in my view, left HL in a difficult position going forward.

That’s why one of the things that Warren Buffett looks for in a stock to buy is an economic moat. Something that allows the business to maintain its competitive position is crucial for a good investment.

Diversification 

Buffett also says that the first rule of investing is not to lose money. I’d therefore look to invest in a way that limits the chance of something going wrong.

That means investing in stocks in different sectors. By diversifying my portfolio, I could attempt to protect myself from unusual events disrupting specific industries.

If I think that banking is intrinsically a good business, I could buy shares in NatWest Group and Lloyds Banking Group. But that would leave me heavily exposed to an unpredictable macroeconomic outlook in Britain.

One way to guard against this is by buying stocks like Tesco and Unilever. As businesses that make everyday essential products, these should continue to produce steady cash flows regardless of the macroeconomic outlook.

Investing £1,000

If I had £1,000 to invest in dividend stocks this month, I’d look buy two companies. The first is Warehouse REIT and the second is Starbucks.

As the name suggests, Warehouse REIT is a Real Estate Investment Trust (REIT) focused on industrial properties. It makes its money by renting out properties to tenants and distributes the rental income to shareholders via dividends.

There’s a short-term risk that this sector might be experiencing oversupply at the moment. But I’m expecting the company to benefit as demand in this sector catches up over time.

Starbucks is a very different type of investment. It’s a coffee chain that has an advantage over competitors that comes from its vast scale. 

Low switching costs in this industry provide something of a risk. But having over 24,000 outlets helps the company keep its costs down, allowing it to charge lower prices to customers.

At today’s prices Warehouse REIT has a dividend yield of around 6% and Starbucks is around 2%. If I had a spare £1,000, I’d invest £500 in each in March to diversify my passive income sources.

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.

Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown Plc, Lloyds Banking Group Plc, Tesco PLC, Unilever, and Warehouse REIT Plc. 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.

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