In my opinion, the best way to start generating streams of passive income is to buy dividend shares.
I plan on buying top-quality businesses today and reinvesting the dividends I receive to set me up for a more comfortable retirement.
The average FTSE 100 yield is 3.9%, but I tend to target stocks with higher payouts than that. In fact, I’ve found two with yields of over 9%.
I believe they’re two of the best stocks the Footsie has to offer. I reckon investors should consider buying them today.
M&G
My first pick is M&G (LSE: MNG). The stock boasts an impressive 9.8% yield. That’s the third-highest on the index.
There are a few main reasons I like M&G and believe that it will keep increasing its payout in the years to come.
Firstly, it has a strong balance sheet with a Solvency II ratio of 203%. That allows it to reward shareholders while still investing in its growth.
On top of that, it has strong brand recognition and a large customer base. In the years ahead, this is only predicted to rise along with demand for the products and services it offers.
The biggest threat to the firm is economic uncertainty. With more volatility expected in the near term, this could see M&G suffer. For example, customers may pull their money from funds.
But with it trading on 8.8 times forward earnings, and with rate cuts expected this year, I think now could be a smart time to pick up some M&G shares.
For 2024, its payout is expected to be 20.2p per share. At its current price, that works out at a whopping 10.1% yield.
British American Tobacco
My second choice is British American Tobacco (LSE: BATS). It yields 9.7%, slightly lower than M&G and fourth on the Footsie. But with its shares trading on around six times earnings, I think they look too cheap to pass on.
While its yield is impressive, what’s even better is its track record of paying out to investors. The company is a Dividend Aristocrat. It has earned that title by paying a dividend for over two decades (25 years). And during that time, its payout has been steadily increasing.
What I like about British American Tobacco, like M&G, is that it has a proven business model and operates in a massive market.
Looking ahead, the business is expecting to generate around £40bn of free cash flow. Analysts predict its earnings will grow at a rate of nearly 50% every year to the end of 2026. That places it in good stead to keep rewarding shareholders for the next few years.
The biggest threat to the business is the rising unpopularity of smoking. Governments across the world are introducing more laws that are putting pressure on the firm.
But it’s evolving to overcome this. For example, it has begun to place more focus on its New Categories unit, which sells non-combustible goods. Last year, revenue for the unit rose 21% while it achieved profitability two years ahead of schedule.
Looking forward, the company aims to generate 50% of its revenue from non-combustible products by 2035.
