7.7%+ dividend yields! Are these the best stocks to buy for passive income?

I’ve been scouring the FTSE 100 and FTSE 250 indices for great stocks to buy for a second income. Are these dividend yields too high for me to miss?

| 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.

Asian man looking concerned while studying paperwork at his desk in an office

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

These FTSE 100 and FTSE 250 shares offer dividend yields far above the average for UK shares. But are they top stocks to buy or simply value traps?

Imperial Brands

Tobacco titan Imperial Brands’ (LSE:IMB) 8% forward dividend yield makes it one of the highest yielders on the FTSE 100 today.

And unlike many UK shares in the current macroeconomic climate, the business looks in solid shape to meet current dividend forecasts. The predicted payout is covered almost two times over by expected earnings.

The addictive nature of Imperial Brands’ products gives profit (and by extension dividend) estimates extra robustness too. So does the strong customer loyalty that its brands like Winston and John Player Special command.

But this is a dividend stock I’m avoiding. I actually sold my holdings in the business several years ago. And since then its share price has cratered as anti-smoking regulation has ramped up across the globe.

Rules on the sale, marketing, and use of cigarettes and other combustible tobacco products are becoming commonplace. They’re exacerbating existing concerns over the health impact of smoking and limiting sales to new generations of smokers.

Unfortunately for Big Tobacco, legislators are also increasingly clamping down on next-generation products like e-cigarettes and tobacco heating products (THPs) as well. Australia is the latest country to ban recreational vaping in recent months to combat vape use among teenagers.

Imperial Brands has spent a fortune developing products like its Pulze thermal heated device. But doubts are rising over whether these new technologies will save the company’s bacon in an increasingly smoke-free society.

I expect the share price to continue shrinking as its market does. Not even the prospect of big dividends in the near term is enough to encourage me to invest.

Tritax Big Box REIT

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

I’d rather use any spare cash I have to buy more shares in Tritax Big Box REIT (LSE:BBOX). I opened a position here in 2020 and a 7.7% forward dividend yield is making me consider increasing my stake.

Tritax’s share price soared on 19 July thanks to better-than-expected inflation data. The bad news is that interest rates look set to keep rising, damaging the company’s growth plans as borrowing costs increase. However, the new consumer price inflation (CPI) suggests rates may not soar as high as experts had feared.

I think the FTSE 250 business is a great share to buy for passive income. Under real estate investment trust (REIT) rules, it is obliged to pay a minimum of 90% of annual profits from rental operations out in the form of dividends. This removes the chance of those who run the company from deciding to hold on to the cash or spend it on other things.

So as demand for large warehouse and distribution hubs picks up I think dividends here could grow strongly. Some of Tritax’s major clients include Amazon, Ocado and Morrisons. I expect the industry to grow strongly thanks to themes like the growth of e-commerce and automation.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has positions in Tritax Big Box REIT Plc. The Motley Fool UK has recommended Amazon.com, Imperial Brands Plc, Ocado Group Plc, and Tritax Big Box 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

Just released: November’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Young female analyst working at her desk in the office
Investing Articles

Here’s how I’d target a £23k second income with £300 a month

If I was building a shares portfolio today, here's how I'd go about it. With these strategies I stand a…

Read more »

Investing Articles

Tesla stock, MicroStrategy: here’s what Hargreaves Lansdown investors bought last week

MicroStrategy and Tesla stock were among the most popular investments last week as Donald Trump boosted markets with his election…

Read more »

Investing Articles

1 AI stock worth considering now Stocks and Shares ISAs are safe!

The Budget brought good news for those of us with Stocks and Shares ISAs! I’ve been looking at this one…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Growth Shares

Up 41% in 1 year, I’m buying more of this growth trust for my Stocks and Shares ISA

A great performance over the last 12 months has pushed our writer to buy more of a very exciting investment…

Read more »

Investing Articles

3 reasons to like the Legal & General dividend

Christopher Ruane explains a trio of reasons why he likes the Legal & General dividend as a source of passive…

Read more »

Investing Articles

Down 16%+, here’s 2 unloved FTSE 100 shares for savvy investors to consider!

These FTSE 100 shares have slumped in the past six months. Royston Wild thinks long-term investors should pay them close…

Read more »

Girl buying groceries in the supermarket with her father.
Investing Articles

Down 15%, but the FTSE 100’s J Sainsbury has a dividend yield over 5%!

Is it time to consider shares in FTSE 100 supermarket chain J Sainsbury for a potentially enduring stream of chunky…

Read more »