In my opinion, the best way to make passive income is by buying dividend shares. Right now, I’m looking at a lot of them that appear severely undervalued.
I think we’re at a crossroads in the market. We’ve endured a rough few years but the macroeconomic environment will improve. The outlook for many businesses in the years to come is picking up as a result. However, many share prices aren’t following suit. Instead, they’re static. Some are evening continuing to fall.
That’s not necessarily a bad thing. With lower prices come higher yields. Here are two stocks I’d buy today if I had the cash.
Legal & General
First up is Legal & General (LSE: LGEN). The business doesn’t need much of an introduction, it’s a FTSE 100 stalwart. Year to date, it’s near enough flatlined, down by 0.3%. I’d use that as a chance to add to my holdings.
With its share price sitting at 247.7p, it yields a meaty 8.2%, comfortably clearing the FTSE 100 average. In fact, it’s one of the highest on the index.
While I’m bullish on the long-term future of the business, let me get my concerns out of the way. The main one is interest rates. The coming months may be volatile. High rates will impact the firm’s asset values. We saw this in action last year.
However, as rates are cut, I’d expect sentiment around the stock to pick up. As I write, its shares look cheap. They’re trading on just nine times forward earnings. What’s more, it upped its dividend by 5% last year and forecasts have it rising to over 9% in the years ahead.
I’m fine experiencing some short-term volatility. In the long run, as it continues to expand in areas such as the UK Pension Transfer Risk market, I think Legal & General could be a shrewd buy.
Tesco
I’m also looking to buy some shares in supermarket giant Tesco (LSE: TSCO). It’s seen 1.8% shaved off its value in 2024 and now could be my time to make a move.
At 3.8%, it offers a smaller yield than Legal & General. Nevertheless, what attracts me to Tesco as a passive income opportunity is the growth its dividend has experienced in the last five years.
During that time, it’s risen nearly 90%. I’m aware dividends are never guaranteed, so it’s progressive signs like this I look out for during due diligence.
There’s a lot to like about the stock, aside from its yield. It’s the largest player in the supermarket industry by some distance. With over a 27% market share, the closest competition is Sainsbury’s with just shy of 16%. With its sheer size, Tesco benefits from economies of scale and branding.
That’s not to say rising competition isn’t a danger. The emergence of Aldi and Lidl has threatened Tesco’s dominance in the last few years. As the cost-of-living crisis continues, many consumers are switching to these cheaper alternatives.
However, Tesco’s continuing with its expansion to combat this, both with its online business as well as physical stores.
These stocks look like smart options to help me start making some extra cash today. If I had some investable funds, I’d snap them up.
