Billionaire investor Warren Buffett once said: “If you don’t find a way to make money while you sleep, you will work until you die.” That’s why I try to generate passive income with all the investments I make.
Let’s be real, who doesn’t like the sound of making extra money with minimal work? There are plenty of ways to do this. For me, one of the simplest is buying dividend shares.
That may sound too good to be true. But it’s not. Inflation has wreaked havoc in the last few years. By earning a passive income, I’m protecting the value of my cash.
If I was just beginning on my investment journey today, here are two shares I’d target. If I had the cash today, I’d snap them up.
Maximising my gains
Before we delve into the companies, there’s one important step I must highlight. That’s to open a Stocks and Shares ISA. Every UK investor has a £20k annual contribution limit to take advantage of. With no taxes due on the capital gains I make or the dividends I receive, using an ISA would be an effective way for me to maximise the amount of money I can make.
My picks
Now that’s out the way, let’s explore the stocks I’d buy. First up is Lloyds (LSE: LLOY).
After its share price has taken a battering in recent times, it offers a yield of 6%. That’s well above the average of the FTSE 100 (4%). What’s more, its dividend is covered a whopping 4.4 times by earnings. Of course, I must note here that dividends are never guaranteed.
On top of that, Lloyds stock looks cheap. It trades on a price-to-earnings (P/E) ratio of 7.6. Its price-to-earnings-to-growth ratio, which is calculated by dividing a company’s P/E ratio by its forecast earnings per share growth rate, is 0.55. That shows me there’s plenty of value to be had with Lloyds.
The year ahead may be rocky. The Bank of England’s actions surrounding interest rates will heavily determine Lloyds’ performance. Should rates fall this year, which many are expecting, this will impact its net interest margin. In turn, this could adversely impact its share price.
Nevertheless, that’s a short-term concern. And at 42p, I see now as a great time to snap up some shares.
My second choice would be Legal & General (LSE: LGEN). The stock currently yields an impressive 8%. That’s the fifth highest on the FTSE 100.
Like Lloyds, it looks cheap. Right now, it trades on a P/E ratio of 7.5. I also like the company because of its strong brand recognition. It’s a stalwart in the insurance industry and provides essential services. They’re the sort of companies I want to own.
Alongside its counterpart Lloyds, Legal & General may be in for a volatile 2024. Its assets under management have wobbled in recent times. This is because investors are opting to keep cash on standby given the tough economic conditions. That’s understandable.
However, as this picks up in the future, I’d expect the Legal & General share price to do the same.
