3 dividend shares for passive income

These three dividend shares could make the perfect additions to a passive income portfolio for long-term income and growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

happy senior couple using a laptop in their living room to look at their financial budgets

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There are many ways to generate a passive income. However, acquiring dividend shares is one of the most straightforward. And it doesn’t require as much capital as other strategies, such as buy-to-let investing. 

So, with that in mind, here are three dividend shares I’d buy for my passive income portfolio right now.

Passive income shares

The first company on my list is the iron ore mining group Rio Tinto (LSE: RIO). This corporation has become a dividend champion in recent years as it reduced debt and capital spending to focus on improving shareholder returns.  

Based on the company’s current projections, and those from City analysts, the stock could yield just over 10% in 2021. A potential dividend yield of 7.3% is pencilled in for 2023. However, I should caution that these are just projections at this stage. 

The company has recently benefited from rising commodity prices. Unfortunately, commodity prices can fall just as fast as they’ve risen. That’s one of the most significant risks the business faces right now. If the price of iron ore drops, Rio’s dividend may not live up to expectations. 

Despite this risk, I’d buy the stock for my portfolio of passive income shares today.

Dividend shares

I think the best stocks to buy for a passive income portfolio are those businesses that have scope for dividend growth. City broker Numis (LSE: NUM) is a good example. 

Over the past five years, Numis has captured an increasing share of the stockbroking market in the UK. As the group has grabbed that share, its operating profits have grown at a compound annual rate of around 7% since 2015.

Management has held its dividend steady over the same period, which means that today, the payout is covered three times by earnings. That suggests to me it’s more secure than most dividends. 

Of course, such a high level of cover only suggests the dividend is more sustainable. But it doesn’t guarantee it. There are many different reasons why Numis could be forced to cut its dividend in future. Regulatory headwinds could increase costs, which would reduce profits. A stock market crash may also reduce demand for the company’s services. 

However, after taking these challenges into account, I’d buy the stock and its 3.2% dividend yield today. 

Portfolio power

Finally, I also like the Gore Street Energy Storage Fund (LSE: GSF), which builds and operates energy storage projects. The goal of these projects is to help the UK transition towards a greener future by building more flexibility into the electricity network

It targets an annual dividend of 7% of net asset value per ordinary share in each financial year, subject to a minimum target of 7p per common share. This target suggests the company could be an excellent passive income investment for a portfolio of dividend stocks. 

Unfortunately, just because the company has set out this target, it doesn’t mean management will meet the objective. Building energy projects is capital-intensive. If Gore Street can’t raise funds to build them, the business could struggle. Simultaneously, the firm may face increasing competition, potentially limiting returns on assets. 

Nevertheless, I think the company has tremendous potential. That’s why I’d buy it for a portfolio of dividend stocks right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. These three dimensions could make the perfect additions to a passive income portfolio for long-term income and GrowthThe 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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »