If starting from scratch with investing, I’d build a stock portfolio for passive income by targeting dividend stocks both inside and outside the FTSE 100 index
Diversification across several positions is wise. But to begin, I’d aim to spread my money between around four companies.
Trading well and growing
The first I’d consider buying right now is financial services and insurance provider Legal & General (LSE: LGEN).
The FTSE 100 stalwart has an impressive dividend record. There hasn’t been a cut in the shareholder payment since at least as far back as 2018. The directors didn’t even trim the payment in 2020 when the pandemic struck. Most years, it’s gone up a little.
I reckon dividends are more important than they might at first seem. The directors’ decision regarding the payment can tell us much about how they view the strength and outlook of their businesses.
In this case, the message is positive. However, the financial sector can be cyclical in nature. So in a severe general economic downturn, Legal & General may suffer from lower earnings. If that happens, we could see a falling share price and declining dividends.
It would be easy for shareholders to lose money in a scenario like that.
Therefore, I tend to prefer businesses with defensive operations to back up my dividend investments. But, right now, I’m bullish about the multi-year outlook for economies, and Legal & General has been trading well.
In March, with its full-year results report, the company delivered an optimistic outlook statement. The directors said they are “confident” the business can deliver “resilient” organic growth because of its “strong” competitive positioning in attractive and growing markets.
The firm’s dividend-paying capacity is underpinned by robust earnings and a strong balance sheet, they said.
Robust dividend records
I’d be prepared to give the company the benefit of the doubt and pile in with thorough research with a view to allocating 25% of my investable money to the shares.
After all, some of my once-preferred defensive companies haven’t been looking too good lately. I’m thinking of names like National Grid, Diageo and Unilever, among others.
But what about the remaining 75% of my money? Well, I’d look closely at fellow FTSE 100 constituent Reckitt Benckiser, which operates in the fast-moving consumer goods space.
The company’s turning itself around. But there’s a decent level of dividend yield on offer and the clincher for me is the stability of the dividend record again.
I’d also consider Supermarket Income REIT in the property sector, and trading platform provider IG Group.
The common theme with all these four choices is a decent level of yield and a strong and growing dividend record.
That’s no guarantee of a successful investment outcome though. All shares come with risks as well as opportunities. Businesses will often run into setbacks from time to time.
However, I’m hopeful that a 25% allocation to each of these four stocks would set me on the road to building a fully diversified portfolio, focused on growing dividends for passive income.
