5 quality passive income stocks

Building a diversified passive income portfolio takes stocks from different sectors and geographies. But the most important thing is focusing on quality.

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The best passive income portfolios are diversified, with shares in companies featuring in different geographies and sectors. This can help generate relatively steady cash in any economic environment. 

A diversified stock portfolio can help limit the effect of the risks associated with any specific business. But the best investments have one thing in common – they focus on quality companies. I think these stocks are worth considering.

Consumer staples

Arguably, the most obvious place to look for reliable passive income is in companies that make the things people use every day. And FTSE 100 company Unilever (LSE:ULVR) has a terrific track record.

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Even in a weak economy people still need food and cleaning products, so it’s not a big surprise the stock’s been a consistent source of dividends. But the business does face some serious challenges.

While demand for food overall doesn’t change much, it’s easy for customers to switch from one brand to another. That means Unilever has to keep spending on marketing to maintain its leading position.

The company’s strong brand portfolio is an important asset, though. Having products retailers want to stock gives the company an advantage when it comes to negotiating with retailers for shelf space.

Since the start of the year, Unilever’s been divesting some of its weaker products to focus on its stronger ones. This is a move that should reinforce the firm’s competitive advantage going forward.

Property

The property sector can also be a great place to look for income stocks. Real estate investment trusts (REITs) have fairly straightforward business models – they own buildings and lease them to tenants.

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Different REITs focus on different types of real estate. LondonMetric Property, for example, focuses primarily on high-quality industrial distribution centres and warehouses. 

The stock has an attractive dividend yield above 5%. And while there’s a risk of oversupply in the warehouse sector, investors might consider a different type of real estate to try and limit this.

As an example, The PRS REIT owns a portfolio of houses. These are generally relatively new with strong ratings when it comes to things like energy efficiency and safety.

A change in rent legislation’s a potential risk that could generate additional costs for the company. But the stock could be a good way to diversify a property portfolio focused heavily on warehouses.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Banking

Buying property often involves significant amounts of debt. As a result, the real estate sector tends to be fairly cyclical – it does well when interest rates are low and less well when they are high.

To build a diversified portfolio, it might be worth considering some companies that have the opposite profile. As the institutions that finance these loans, higher interest rates tend to be good for banks.

Lloyds Banking Group has an enviable market position in the UK banking sector. Having the largest share of consumer deposits gives it an advantage when it comes to financing loans. 

The stock comes with a dividend yield of just under 5%. And investors worried about the ongoing investigation into car financing could look to the US for additional opportunities. 

Citigroup‘s a stock I’ve owned for a while now. There’s a risk its restructuring might take some time, but its global reach is unparalleled and provides a nice contrast to Lloyds’ UK-focused operations.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Stephen Wright has positions in Citigroup and Unilever. The Motley Fool UK has recommended Lloyds Banking Group Plc, LondonMetric Property Plc, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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