Investors searching for passive income tend to focus on the same small pool of blue-chip stocks. FTSE 100 companies like Lloyds, Legal & General, National Grid and Shell in particular tend to dominate attention from retail investors.
Footsie shares such as these can be excellent for dividends, often supported by their market-leading positions in mature sectors and robust financial foundations. Yet investors who concentrate solely on UK large-cap stocks may be missing out on excellent investment opportunities elsewhere.
2 top income stocks
Take the following two dividend stocks, for instance. Each carries a large forward dividend yield that comfortably beats the FTSE 100 average of 3.6%. They also look in good shape to continue growing shareholder payouts beyond the near term and I feel they’re worth considering.
| Dividend share | Dividend yield |
|---|---|
| Lion Finance (LSE:BGEO) | 5.6% |
| iShares EM Dividend ETF (LSE:SEDY) | 8% |
Dividends are never, ever guaranteed. But if City forecasts for these companies prove accurate, a £20,000 investment spread equally across these three shares will provide a passive income of £1,360 this year alone. That’s based on an average yield of 6.8%.
Brilliant bank
Lion Finance isn’t as popular as the FTSE 100’s high-yield banks. But its dividend yield for this year is far ahead of those of any of the UK’s blue-chips like Lloyds, NatWest and Barclays.
With a CET1 capital ratio of 17.1%, the FTSE 250 company looks in good shape to hit this year’s dividend forecasts too.
Looking further out, I feel that Lion Finance’s focus on the Georgia’s booming banking market will allow it to keep delivering sector-beating dividend growth. The total payout rose 12.5% year on year in 2024, driven by a 31.2% improvement in pre-tax profits.
Be aware though that fierce competition could impact future profits. TBC Bank and its huge investment in digital banking in particular poses a not-insubstantial threat.
Top fund
As I say, dividends are never a sure thing. Even companies with decades of income stability behind them can falter when internal or external pressures emerge. This was certainly the case with Shell, which cut cash rewards for the first time since 1945 during the pandemic.
Investors can reduce the impact of such events by buying an exchange-traded fund (ETF) like the iShares EM Dividend ETF. With holdings in 115 different businesses, it still has the strength to provide large dividends even if one or two holdings disappoint.
As the ‘EM’ in its name implies, this particular fund invests in emerging market companies with enormous dividend yields. It has especially substantial holdings in Brazil and China, with other prominent territories including Indonesia, India and Poland.
One potential drawback in the near term is its high exposure to cyclical shares. Major holdings include energy companies (like Petrobras) and financial services businesses (including China Construction Bank).
Yet over the long term, I’m optimistic it could deliver excellent returns, thanks to its developing markets’ rising wealth and growing populations.
