There are many stocks that pay dividends. Strictly, the likes of Microsoft and Experian count as dividend shares. But I would suggest investors looking for passive income shouldn’t spend much time looking at either.
Both could turn out to be brilliant investments – as they have been in the past. But the best dividend shares, in my view, are the ones that actively look to return cash to shareholders.
Chord Energy
Chord Energy‘s (NASDAQ:CHRD) is a good example. Its balance sheet is in a strong position and this means the company has committed to returning 75% of its free cash to investors.
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One of the reasons billionaire investor Warren Buffett likes Occidental Petroleum is that the company doesn’t burn cash on expensive exploration projects. Instead, it distributes it to shareholders.
Chord’s operations are mostly situated in the western US’s Williston Basin. This means its extraction costs are likely to be higher than Occidental’s, which is based in the southwestern US’s Permian Basin.
That’s the biggest risk with the business. It means changes in the price of oil – especially downwards – are likely to have a much larger effect on the firm’s profits and dividends.
Investors that don’t have a positive view on oil prices should probably avoid buying shares in Chord – or any other oil producer. But I think the long-term picture’s encouraging.
Given this, I think the stock could be a great source of passive income. I bought shares in November and intend to add to my investment in December.
Primary Health Properties
Primary Health Properties (LSE:PHP) is another company I’m buying and that’s literally designed to return cash to shareholders. It’s a real estate investment trust (REIT) that owns and leases GP offices.
As an asset class, REITs originated in the US in the 1960’s. Their aim was to allow ordinary people to participate in (what was then) a booming property market.
In general, REITs make money by leasing properties to tenants. And in exchange for tax exemption, they are required to distribute 90% of their profits to shareholders as dividends.
That can make them a reliable source of income. And this is especially true with Primary Health Properties, which maintains high occupancy levels from the NHS.
This limits the risk of a rent default, but there’s a significant risk. Not being able to retain its cash means growth has to be financed with debt and that shows up on the firm’s balance sheet.
The danger of Primary Health Properties having to issue shares is one to take seriously. But with a dividend yield of over 7%, that’s a risk I’m willing to take at today’s prices.
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Passive income
Growth-focused businesses can be great passive income investments. But I think some of the best opportunities right now are in companies that look to distribute their cash to shareholders.
Chord Energy and Primary Health Properties are two examples of this. And while they’re not the most well-known stocks, they’re my top dividend opportunities for December.
