The FTSE 100 and the FTSE 250 both advanced in July. But a strong stock market isn’t necessarily a good thing for dividend investors looking for shares to buy.
Higher prices typically mean lower yields and this is true across the board. There are however a few companies that look interesting from a passive income perspective in August.
Diageo
Shares in Diageo (LSE:DGE) seem entirely oblivious to share prices going up at the moment. And while that’s a bad thing for anyone wanting to sell them, it’s helpful for potential buyers.
There are three big issues keeping the stock down. One’s the ongoing uncertainty around tariffs, another’s the threat of changing consumer preferences, and the third’s the rise of GLP-1 drugs.
None of these risks can be ignored, but I don’t think any of them is decisive. In terms of tariffs, the firm’s already used to negotiating these from various countries with import restrictions.
While alcohol consumption as a whole might be declining, the market for spirits is still showing signs of growth. And this is positive for a company with a portfolio focused on premium spirits.
The GLP-1 issue’s also important, but the user base is predominantly female while Diageo’s customer base is predominantly male. So the effect on the company appears limited.
All of these are reasons to think the 4.25% dividend yield’s a buying opportunity rather than a trap. I think it’s worth considering for anyone looking for passive income investments.
Taylor Wimpey
Taylor Wimpey (LSE:TW) shares fell 14% in July as the company reported a first-half loss. But a closer look suggests this might be an overreaction from the stock market.
The firm lowered its dividend, but the yield’s still above 9%. The bigger issue though, is that a net loss means it isn’t covered by earnings or free cash flows and that’s a risk for investors.
There are however, two things worth noting. The first is that the drop in earnings is largely due to the business setting aside £222m as a one-off cost to cover remedial cladding work. That’s a genuine cost, but it’s unlikely to be an ongoing expense.
And the second point is that Taylor Wimpey pays its dividends based on its assets, rather than its earnings. This isn’t sustainable indefinitely, but it can provide investors with steady income when the firm has to deal with one-off costs, such as right now. Importantly, the outlook’s much brighter.
Management’s expecting over £400m in operating income (which does cover the dividend) for the full year. So investors should take a look at a potential long-term opportunity.
Passive income
High dividend yields are – almost by definition – a sign that investors are concerned about a company’s long-term prospects. But the stock market isn’t always right about these things.
Both Diageo and Taylor Wimpey are facing challenges, but their dividend yields are unusually attractive as a result. And I think they’re worth considering from a passive income perspective.
