Dividends are a tried and trusted method to earn passive income but it’s best practice not to put all eggs in one basket. If a company stumbles, both the share price and dividend payments could take a nosedive.
Still, while diversification’s key, focusing on specific stocks can be a fun thought experiment. Which companies offer the most reliability and peace of mind?
If I could only choose two stocks to go all in on, it would be these.
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The best of both worlds?
Healthcare’s often considered a low-risk, non-cyclical market that remains in high demand from a growing and ageing population. Housing’s a slightly riskier market but with more growth potential.
The two make a formidable team in the form of Primary Health Properties (LSE: PHP).
The real estate investment trust (REIT) has a portfolio of healthcare facilities that serve 6m patients. That’s almost 9% of the UK population. And it’s a solid dividend payer to boot, with a 6.7% yield and 27 consecutive years of growth.
In exchange for tax benefits, REITs are required to return 90% of profits to shareholders. In my opinion, that makes them a reliable option for long-term passive income. Moreover, 89% of its rental properties are roll-funded by government bodies.
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While healthcare’s a defensive industry, housing’s at more risk. If the housing market takes a dive, Primary Health’s share price could fall too. There’s evidence of this happening in 2007 during the housing market crash. More recently, the price suffered when interest rates soared in 2022. If similar events occur again, the falling share price could threaten dividend payments.
But previous recoveries have been swift so I feel the trust is reliable. Over the past 20 years, it has delivered annualised returns of 2.91%. Combined with an average 5% yield, total shareholder returns have been almost 8% a year on average.
Decades of dividend growth
City of London Investment Trust (LSE: CTY) holds the record for the longest uninterrupted period of dividend growth. For 58 years, the trust’s been increasing its annual dividend payments. At 4.72%, it doesn’t have the highest yield on the FTSE but its dividend track record is unmatched.
The trust invests mainly in leading UK companies. Among its top 10 holdings are well-known British brands such as Tesco, HSBC, and Shell. Still, it isn’t entirely reliant on the local economy. Due to the international reach of large UK firms, 60% of the revenue from its holdings comes from overseas. This makes it defensive against both industry-specific and regional risk.
However, it’s not without risk. Economic downturns have hurt the shares in the past and will likely do so again. If the fund’s managers make bad investment decisions, it could suffer losses. There’s also the risk of losses from exchange rate fluctuations on revenue that’s derived from abroad.
In the past 30 years, the price has increased at an average of 3.88% a year. Combined with an average 4% yield, long-term returns have been around 7.8% a year since the early 90s.
