Investing in dividend stocks can be a great way to generate passive income. Pick the right stocks (it’s crucial to be selective because dividends are never guaranteed) and you could be paid regular income for the rest of your life.
Here, I’m going to discuss three British dividend stocks I’d buy for passive income. All are reliable dividend payers and in my view, having the potential to deliver strong long-term total returns (capital gains and dividends).
A defensive stock for passive income
One of the first dividend stocks I’d pick today if I was building a passive income portfolio would be Unilever (LSE: ULVR). It’s a leading FTSE 100 consumer goods company that owns a world-class portfolio of well-known brands (Dove, Domestos, Lipton, etc). Currently, the stock offers a prospective yield of about 3.5%.
Unilever has a lot going for it from an income investing perspective. For starters, it’s a stable ‘defensive’ business. Unlike highly ‘cyclical’ companies, Unilever doesn’t suffer from large decreases in revenue and earnings every few years. This means dividends are quite consistent. Secondly, it has attractive long-term growth prospects due to its emerging markets exposure. As the company grows over the long run, it should continue to raise its dividend payouts.
Unilever shares aren’t without risk. If growth slows, the share price could fall and/or the dividend could be cut. However, with the stock trading on a forward-looking P/E ratio of less than 20, I think the risk/reward proposition here is attractive.
A British dividend legend
Another British dividend stock I’d buy today is Smith & Nephew (LSE: SN). It’s a healthcare company that specialises in joint replacements. The prospective yield here is about 1.8%.
Smith & Nephew is nothing short of a dividend legend. This is a company that’s paid a dividend every single year since 1937. Even when sales fell significantly during Covid-19, SN paid a dividend. That’s the kind of reliability I’m looking for when I invest in dividend stocks for passive income.
I think this company has attractive prospects for both short- and long-term growth. In the short term, it should enjoy a rebound in sales as medical procedures are resumed, post Covid-19. Meanwhile, in the long run, it should benefit from the world’s ageing population. This long-term growth could result in larger dividends.
This isn’t a cheap dividend stock. Currently, the forward-looking P/E ratio is 24. This adds risk to the investment case. I’m comfortable with this valuation, however, given the company’s track record and growth potential.
A top FTSE 100 dividend stock
Finally, I’d also pick Sage (LSE: SGE) for passive income. It’s a leading provider of cloud-based accounting solutions. Its prospective yield is about 2.7%.
This is another high-quality FTSE 100 business. Recurring revenues are high, and the balance sheet is solid. Meanwhile, growth potential is significant. Analysts at Citi expect the company to generate revenue growth of 7% per year between now and 2025. All in all, I think SGE is a great dividend stock.
A key risk here is the threat of competition. One particular rival that could steal market share is Xero, which has a great offering. This is something I’ll be keeping an eye on. It could impact growth and the dividend. The valuation here is also quite high (forward P/E of 27), which adds risk.
Overall, however, I see a lot of appeal in this dividend stock.
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Edward Sheldon owns shares in Unilever, Smith & Nephew, Sage, and Xero. The Motley Fool UK has recommended Sage Group and Unilever. 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.