What’s the best way to sort the wheat from the chaff when it comes to choosing passive income dividend stocks? I aim to keep my process as simple as possible, at least to begin with.
Three essential steps
The first thing I look for is the level of the dividend yield. That means chucking anything out that’s not going to give me at least 5%. Income at that level more or less matches what’s available from many bank savings accounts, and that’s a good start.
However, the attraction of stocks over bank accounts is that dividends have the potential to grow over time. When a company increases its dividend, the yield on my purchase price goes up.
So my second step is to search for a strong multi-year dividend record. For that, I’m looking for payment increases every year and no down periods. The strength of underlying operations often shows up in a company’s dividend record. After all, most directors only cut the pay-out because they must – usually if the underlying business is weak.
My third step is to look for a low (P/E) multiple to help make sure the stock is offering value.
This table shows the three top passive income stocks my search uncovered.
| Company | Ticker | Recent share price | Market capitalisation | Approximate forward-looking dividend yield | Approximate forward-looking P/E |
| Redde Northgate | REDD | 380p | £852m | 6.6% | 7 |
| Impact Healthcare REIT | IHR | 85p | £349m | 8.2% | 11 |
| IG Group | IGG | 723p | £2,699m | 6.5% | 7 |
Redde Northgate (LSE: REDD) provides commercial vehicle solutions for businesses and organisations. It buys vans, trucks and cars to rent out then sells them when they’re past their best.
It’s a steady operation judging by the dividend record. The shareholder payment has increased every year since at least 2018, except during the pandemic in 2020.
Dividend increases ahead
Trading has been good, and in December last year the company issued an upbeat outlook statement.
City analysts expect normalised earnings to ease back by just over 11% in the current trading year to the end of April 2024 and by a further 6% or so next year. However, the dividend looks set to increase a little in both years.
There’s likely to be an element of cyclicality to operations, which adds a bit of risk for shareholders. On top of that, the nature of the business means it carries a chunky debt-load, used to finance the vehicles.
Nevertheless, this stock looks worth consideration as part of a diversified portfolio.
IG Group is a global financial technology company and spread bet platform provider. Meanwhile, Impact Healthcare REIT invests in UK healthcare real estate assets, such as residential and nursing care homes.
Of course, there are risks with both companies. For example, the real estate sector has been feeling the pain recently and is cyclical. But the attractions of the services offered by IG Group can ebb and flow with investors too.
On balance though, I believe all three of these stocks have the potential to make enduring passive income selections. I’d dig in with deeper research right away.
