Building a substantial passive income stream has always been a dream of mine.
Ever since I learned about the fundamentals of investing, I was captivated by the idea that I could generate enough money by buying dividend shares.
Finding the right companies
Dividend shares are companies that pay out a certain amount of their profits to shareholders rather than just reinvesting cash into the business.
The FTSE 100 comprises a diverse group of companies with different payout ratios. At the time of writing, the index boasts an average dividend yield of 3.8%.
This yield figure represents annual dividends per share divided by the current share price.
That means a falling share price could make a company appear to be a steal, so it always pays to do thorough research.
While there are many FTSE 100 dividend shares to consider, I’ve highlighted two companies in more cyclical sectors that I’ve got my eye on.
Two shares to build my passive income
The first name on my watchlist is Rio Tinto (LSE: RIO). Rio Tinto is a major global metals and mining group with strong earnings from base metals like iron ore and copper.
Rio Tinto announced its full-year results on 21 February and investors weren’t thrilled with the news. Softer commodities prices saw underlying earnings before interest, tax, depreciation and amortisation (EBITDA) fall by $1.5bn to $23.9bn for the year.
That may not scream ‘passive income candidate’ to most. However, Rio Tinto announced a 435 cents per share dividend in its results.
While that’s down 12% year over year, it represents a 60% payout ratio for the eighth year in a row.
It’s not just Rio Tinto with its 6.3% dividend yield that I’m watching. Major packaging group DS Smith (LSE: SMDS) is another FTSE 100 group that could help me generate passive income.
The international packaging company is a leading producer of recycled paper board and corrugated packaging for the likes of Amazon. Unfortunately, inflationary pressures and falling consumer spending have weakened demand for packaging in recent times. If this continues, the stock may not rise as much as I’m expecting it to, or management might even decide to cut the dividend.
However, I do find the company’s 5.6% dividend yield and leading market position quite compelling. DS Smith has been a reliable dividend payer, which means it makes my current shortlist.
Falling interest rates and a rise in consumer spending would make DS Smith an interesting proposition.
Key takeaways
Building a £15k passive income is never going to be easy. There’s a lot of research required to find the consistent dividend payers with good earnings prospects.
Both Rio Tinto and DS Smith operate in more cyclical sectors than some other FTSE 100 dividend shares. So if I were to invest in the companies but then needed to sell them in an emergency a few short years later, there’s a chance I might not get all of my original investment back. However, I like the income they are providing even when times are a bit tough.
With yields in the 5.5-6.5% range, this implies a portfolio value of £250k. Clearly, that sort of dough means this dream of mine won’t happen overnight.
However, reinvestment of some tasty dividends and disciplined investment could make that £15k a reality in coming decades.
