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Here are 10 stocks on my passive income watch list

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With eyes turning to life after lockdown, I’ve been thinking about my passive income list. That’s a list of the stocks I like to help me generate income.

I like investing a little each month in shares to generate passive income. That takes little time or effort on my part. It also doesn’t need a lot of capital – I could generate passive income this way for a pound a day. Of course, that relies on dividends being paid, which is never guaranteed.

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But here are 10 stocks I’m currently considering for my passive income list.

Dividend growers

Some companies have a long history of growing dividends, which could help increase passive income each year.

Past dividends are not a guide to future dividends. But if a company has a good business model, seems well-run and is cash generative, I often consider its potential to grow dividends in future.

An example of such a share I would pick for my passive income list is Diageo. The branded drinks manufacturer has been growing dividends for over three decades. Declining alcohol consumption habits in key demographics is a risk. But I like the company’s solid portfolio of premium brands.

A couple of less well-known companies that have also grown dividends annually for decades include fuel group DCC. At 2.3%, I think the yield reflects the fact that investors know and like the company’s dividend policy. Risks include any decline in gas usage.

Alarm specialist Halma yields only 0.7%. That might not sound like a lot of passive income. But over four decades of annual dividend increases of at least 5% attract me. A risk is that dividends might not keep being raised. But the focus on often essential alarms suggests a strong future end market if the company can keep growing its customer base.

Strong cash flows

A company that throws off a lot of free cash is in a strong position to pay dividends. That’s why I look for free cash flow when assessing companies on my passive income list.

Tobacco giants Imperial Brands and British American Tobacco are both large free cash flow generators. I hold both for their yields of 8.9% and 7.5% respectively and would consider adding more. Tobacco demand is falling in many markets, though, which could hurt future free cash flow generation ability.

Free cash flow for oil companies is often linked to the oil price, so an oil price fall can hurt profits. But the oil price recovery bodes well for BP and Shell. Both cut their dividends last year, yet they still yield 5.3% and 3.6% respectively.

High yielders on my passive income list

I would also consider high-yielding shares, even if their dividend history is mixed. For example, financial services provider M&G has a short history as an independent listed company. But its yield of over 8% earns it a place on my passive income list. Risks include any economic downturn hurting demand for financial services.

Major insurance brand Direct Line yields over 7%. I am a bit wary about the fact that directors have sold shares lately but haven’t bought any in over a year. But I do think the powerful brand is an asset.

Finally, telecoms giant Vodafone yields almost 6%. I like its strong market position, although risks include the high costs involved in setting up 5G.

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christopherruane owns shares of British American Tobacco and Imperial Brands. The Motley Fool UK has recommended Diageo, Halma, and Imperial Brands. 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.

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