Passive income from shareholder dividends can be used as your personal income, or it can be rolled back into more shares to build wealth. But I reckon the strategy will only work well if you select shares backed by high-quality businesses.
Ideally, I want to see revenue, earnings, cash flow and shareholder dividends all rising a little each year. At the very least, strong and stable cash flow is essential, and we can usually find it when companies have operations trading in a strong niche in the market. For example, here are two stocks I believe could be decent vehicles for harvesting passive income.
The pharmaceutical sector is home to several companies generating consistent cash flow and GlaxoSmithKline (LSE: GSK) is one of them. The cash keeps rolling in because people buy the firm’s medicines repeatedly. And cash is good for paying shareholder dividends.
The patent-expiry issues in the sector over the past few years have stalled growth at GlaxoSmithKline, but the company has held the dividend steady through those challenging times. And with the share price close to 1,663p, the forward-looking dividend yield for 2021 is around 4.8%, which strikes me as worth collecting.
The firm recently announced plans to prepare for the separation of its business into two companies. One will be a biopharma enterprise with research and development aimed at science related to the immune system, the use of genetics and new technologies. And the second company will be “a new leader in Consumer Healthcare.”
I reckon the new focus could end up generating more value and better returns for shareholders in the years ahead. To me, the shares look attractive right now.
Products for smokers
Tobacco and new-generation products for smokers are fast-moving consumer goods that tend to generate consistent cash flows for firms such as British American Tobacco (LSE: BATS).
The company’s record on cash flow and shareholder dividends is impressive, despite the weakness in the share price we’ve seen lately. However, the stock has been showing signs of recovery since last autumn.
Despite scares about tougher regulation in the US regarding vaping products and flavoured cigarettes, the tone from BATS’ trading updates has remained optimistic. Chief executive Jack Bowles said in a trading update at the end of last November that he thinks the issues around vaping in the US should lead to a better and stronger regulatory environment in which BATS is “well placed to succeed.”
Meanwhile, with the share price near 3,326p, the forward-looking dividend yield for 2020 is running at about 6.7%. I reckon the business is in good health with revenue, earnings and the shareholder dividend all set to rise in the immediate years ahead.
I see the shares as attractive and would buy some along with those of GlaxoSmithKline. To me, both stocks look capable of delivering rising passive income for shareholders in the years to come.
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Kevin Godbold owns shares in British American Tobacco. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.