When it comes to generating passive income, holding dividend shares is surely one of the easiest options available to everyday folk. Fortunately, there’s no shortage of low-priced, high-quality candidates for investors to consider buying as 2025 gets under way.
Stunning year
Online trading platform provider IG Group (LSE: IGG) is one example. It’s had a great 2024 with the shares surging 30% on the back of encouraging updates on trading. Indeed, FY25 has started well with revenue increasing 15% to almost £279m in the three months to the end of August as concerns about a US recession saw traders rushing to profit from short-term volatility.
Considering that the market has been getting increasingly skittish about valuations ever since (and IG makes more money when emotions are running high), there’s a chance this momentum has been maintained over Q2. With half-year numbers due in late January, we won’t have to wait long to find out.
In the meantime, the shares still trade on a price-to-earnings (P/E) ratio of 10. That strikes me as a great deal considering the £3.5bn cap boasts a very strong financial position and sky-high margins.
Worth the risk?
It’s not all gravy though. This line of work is often under the scrutiny of regulators. Competition also remains fierce. It may be the market leader at what it does but IG simply can’t rest on its laurels and allow rivals to swoop in and draw clients away.
Still, I reckon holders are fairly compensated for these threats by a forecast dividend yield of 4.9%. For comparison, the FTSE 250 index yields 3.3%.
It’s also worth noting that payouts were held steady during the Covid-19 pandemic and have been rising since. This sort of consistency is very attractive.
Troubled times
A second dividend share that looks temptingly priced is mining giant Rio Tinto (LSE: RIO). While a P/E of nine isn’t exactly a bargain when compared to sector peers, it’s still far below the average among UK stocks in general.
In contrast to IG, the FTSE 100 member has had a tough 2024 and drastically underperformed the index. Much of this poor form is undoubtedly due to concerns about the health of China’s economy and the subsequent impact on metal prices.
In addition to Rio having no say on the value of what it digs up, potential long-term holders must appreciate that mining is expensive and difficult work, prone to delays and production hurdles.
Commodities supercycle ahead?
Despite these issues, I maintain that Rio could be set for a purple patch in the next decade or so. A world becoming increasingly reliant on renewable energy sources should mean huge demand for metals like lithium, aluminium and copper. Supply of these is already constrained. This makes me bullish on the company’s ability to continue paying dividends.
Speaking of which, the shares are down to yield a strong 6.6% in FY25 — nearly double that of the FTSE 100. This distribution also looks like being comfortably covered by expected profit.
Of course, analysts can be (and often are) wide of the mark. A worsening outlook for the global economy could put paid to that projection.
But this is exactly why I wouldn’t stop at just Rio Tinto (or IG Group) when hunting for passive income.
