With February almost upon us, I have been considering ways I could possibly boost my passive income streams. One way would be to buy some more dividend shares for my ISA. But what shares to buy?
If I had spare money to invest next month, here are two I would happily purchase.
Legal & General
The financial services company Legal & General (LSE: LGEN) is solidly profitable. Last year it reported post-tax earnings of £2.3bn. Yet the market capitalisation of £15.3bn means that the FTSE 100 share trades on a price-to-earnings ratio beneath seven.
That looks cheap to me for a company of this quality. On top of that, the share has a dividend yield of 7.6%. It has set out plans to grow its dividend this year, as it did last year.
In practice, dividends are never guaranteed. They rely on a company’s commercial performance to be sustained. I do see some risks for the pensions specialist with the iconic umbrella logo. If financial markets are turbulent, for example, some policyholders may pull their funds, hurting revenues and profits.
But I think Legal & General has some real strengths. It is well-known in its target market and has deep financial markets expertise honed over centuries. It has a large customer base and operates in a sector I expect will see strong, resilient demand for decades. That is why the business is on my list of shares to buy.
Aviva
I would also be happy to buy some shares in insurer Aviva (LSE: AV).
Like Legal & General, it has cut its dividend at some point over the past couple of decades, a useful reminder to a long-term investor like me that no dividend is ever guaranteed, even from blue-chip financial services companies.
But with a current yield of 7.3%, I find the passive income prospects here attractive.
Aviva benefits from a large customer base, a proven business model in insurance and ongoing high customer demand. It has reshaped itself under current management to be a simpler, more focussed operation playing to its strengths.
Operating in fewer markets than before adds some risks, for example, if pricing competition pushes down profit margins in its main UK market. It also faces risks common to all insurers, like mispricing risks and incurring an underwriting loss.
However, I think the sharper geographic focus makes financial sense. It should help Aviva do what it does best where it has the best chance of succeeding.
Over time, I am hopeful that the company can grow its earnings and return a higher amount to shareholders in the form of dividends. I would be happy to tuck the shares away in my ISA and hopefully benefit from dividend income streams in the years to come.
