Passive income – where you earn money for doing nothing – is considered by some to be the holy grail of personal finance. If you build up enough of it, it can enable you to quit the rat race, and spend your time doing whatever you want.
There are many ways to generate passive income, but dividend investing would have to be one of the easiest. With dividend investing, you get paid regular cash payments simply for being a shareholder (i.e. an owner) of the company, meaning it’s a lot less hassle than other methods of generating passive income such as owning buy-to-let property, or starting an online business.
Here in the UK, there are loads of stocks with high dividend yields, so it’s easy to put together a portfolio that churns out a substantial amount of cash flow. Here’s a look at two FTSE 100 dividend stocks that I believe could be worth a closer look if you’re looking to build a second income.
Legal & General
Legal & General (LSE: LGEN) is one of my favourite high-yield dividend shares. Not only does the stock offer a fantastic yield of around 6% (using last year’s dividend of 15.4p per share), but the group also has a solid track record of lifting its payout, having now recorded eight consecutive inflation-beating increases. City analysts expect further dividend increases for FY2018 and FY2019 too, meaning the stock offers an even higher yield on a forward-looking basis. Dividend coverage looks solid too, which suggests that the dividend should be sustainable and that investors aren’t at risk of a dividend cut.
Another reason I like Legal & General is its diversified business model. The group offers investment management, retirement and insurance solutions, so its eggs aren’t all in one basket. As a key player in the exchange-traded fund (ETF) space, the group looks well-placed to benefit as UK investors save more for retirement.
There are risks to the investment case with LGEN, of course, as there are with any stock. However, with this stock currently trading on a P/E ratio of just 8.1, I believe the risks are baked into the share price. The current low valuation and high yield are a great opportunity, in my view.
Another FTSE 100 dividend stock that I hold in high regard for its passive-income generating potential is fellow financial services group Aviva (LSE: AV). It currently offers a trailing yield of 6.6%, and City analysts expect a 10% dividend hike for FY2018 and FY2019, meaning those buying now could potentially pick up a FY2019 yield of nearly 8%. Dividend coverage is solid here too.
Aviva shares underperformed the FTSE 100 in the second half of last year after CEO Mark Wilson stepped down in October, leaving the group without a leader. Yet in my view, Aviva’s share price decline between July and December was a little excessive and, in late December, when the stock was under 370p, I stated it was simply too cheap. Since then, the shares have surged around 14%.
However, despite the share price bounce over the last month, I still believe there’s plenty of value on offer right now, as the stock’s forward P/E is just 7. For those seeking passive income, I think Aviva shares are certainly worth considering.
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Edward Sheldon owns shares in Legal & General Group and Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.