Passive income has become a watchword for many recently. For those of us who invest in the stock market, however, it is something we have been taking advantage of for many years. Personally, generating passive income through shares has been one of my main investment strategies.
What are passive income shares?
Passive income shares are those that pay out a cash return. In the stock market, this is done through dividends. Dividends are paid on a pence-per-share basis, so the price you buy the stock at helps determine your percentage return. This is the dividend yield, and is key when looking for passive income from a stock.
Of course with shares you also have to consider your capital – the initial investment. Share prices go up and down so you want to make sure you don’t lose your principle in search of a good income stream.
With all these things in mind, here are my top three passive income shares right now.
The aeronautical engineering company is a solid dividend stock. Though not often making headline-grabbing news, BAE Systems (LSE: BA) has been a steady performer for many years.
In terms of passive income, its yield of about 4.6% it is not the highest return of all shares. However, I am of the opinion it may be one of the most stable right now.
Among other things, the German government recently approved the purchase of 38 Eurofighters from BAE. Meanwhile the UK government has set out plans for increased defence spending. BAE’s future looks bright for some years to come I think.
The oil giant is the next in line for my choice of top passive income shares. Though BP (LSE: BP) cut its dividend earlier this year, its low share price means it is still yielding over 8%.
The BP share price is low because of the year crude oil prices have had. Coronavirus and oversupply have kept energy prices subdued. However with a vaccine and increased optimism in place, I think this will start to fade.
There will remain a large spare capacity in the crude market weighing on prices, but I think OPEC and Russia will help bolster crude prices by keeping supply reduced. BP was always a good dividend payer in the past. For me, this sets it up to be one of the best passive income shares going forward.
Last, but by no means least in my choice of passive income shares, is the pharmaceutical giant GlaxoSmithKline (LSE: GSK). Naturally Covid vaccines have been dominating the news recently, however this is not directly why I would choose GSK.
It currently yields about 5.7%, making it a solid choice on payout alone. Though I don’t think the Covid-19 vaccine will make any pharmaceutical company much profit right now (the PR alone from profiteering would not be worth it), in the long run there is likely to be renewed interest in pandemics. Pharmaceutical firms will see the benefit in the long term.
Currently yielding about 5.7%, GlaxoSmithKline is my top UK pharmaceuticals pick in terms of good passive income shares.
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Karl has shares in BAE Systems and BP. The Motley Fool UK 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.