Interest rates are fairly high at the moment. I’m not sure how long this is going to last though, and there are dividend stocks I think can offer much more durable returns.

Inflation vs GDP

It looks like the Bank of England (BoE) is facing a dilemma. Ideally, the central bank would like inflation to come down to around 2% without the UK going into recession – but the economy isn’t playing ball at the moment. 

The most recent inflation reading came in at 4%, up from 3.9%. That’s hardly a big lift, but it’s a move in the wrong direction, which has caused investors to revise their expectations of imminent interest rate cuts.

This has caused share prices to fall – and dividend yields to rise. And some have now reached a point where I think they might be underestimating the likelihood of lower interest rates.

UK GDP has been trending lower since the start of 2023 though. So with inflation staying around the 4% mark, I wouldn’t rule out the BoE having to cut rates sooner than it would like in order to avoid a recession.

If this happens, I would expect share prices to go up and dividend yields to go down. So I’m looking to strike now, while I think there’s an opportunity to lock in passive income returns for the long term.

Dividend stocks

With the recent drop in share prices, I think there are some dividend stocks with attractive yields at the moment. A good example are the preferred shares in Aviva (LSE:AV.B). 

At today’s prices, the stock comes with a 6.5% dividend yield. And as a preferred stock, it has a bit less risk than most common shares. 

This is because preferred dividends have to be paid in full before any common equity dividends can be paid. That means Aviva could cut its dividend entirely, but not pay common shareholders without also paying preferred ones.

The downside to this kind of stock is that the payment won’t go up. So an £11,000 investment would return £715 in the first year and the same again in year 10.

Overall, I think Aviva preferred shares right now are offering a 6.5% annual return with less than average risk. So I wouldn’t be looking to accept anything less than that from dividend stocks over the next decade.

Finding stocks to buy

There are some dividend stocks I think can probably achieve that rate of return, such as Dividend Aristocrat Primary Health Properties. And there are other cases – like Diageo – where I think it’s going to be close.

Reinvesting the distributions at a 6.5% annual return though, could turn £11,000 today into something that distributes £1,260 a year – or £105 a month – after a decade. And that looks like a decent return to me.

Keeping cash in savings looks attractive with interest rates high. But I think for investors looking for long-term passive income, dividend stocks look like a much more promising investment.

The post £11,000 in savings? Here’s how I’d try to turn that into £105 a month in passive income appeared first on The Motley Fool UK.

This makes investing in an ISA a great way of buying shares to generate passive income. And I think there are some opportunities right now that even risk-averse investors should consider seriously.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Preferred shares

Right now, Aviva (LSE:AV) shares come with a 7.42% dividend yield. That’s a good yield, but relying on this kind of investment is risky — the company has cut its dividend before and there’s no guarantee that it won’t happen again.

A less risky alternative is Aviva’s preferred stock, which trades under the ticker symbol ‘AV.B’. That comes with a fixed dividend, which offers a yield of 6.8% at today’s prices.

That’s lower than the yield on the common stocks, but the risk is also significantly lower. This makes preferred shares a much more stable source of passive income.

Aviva’s preferred shareholders are due a dividend of 8.375p per year. And this has to be paid in full before any remaining cash can be distributed to owners of common equity.

The significance of this came out in 2020. When the company had a bad year, preferred shareholders received their distributions in full, but the dividend paid to common shareholders went down.

In exchange for downside protection, preferred shares generally have limited upside. A fixed dividend can’t go down, but it also can’t go up, meaning owners of common stocks will do better if the business does well.

REITs

Real estate investment trusts (REITs) are another interesting asset class for passive income investors. These are companies that own properties and lease them to tenants, before distributing the income as dividends.

Dividends from REITs are not fixed, meaning they can go down. But it’s worth noting that they have a legal requirement to distribute their income, so any increases also get passed through to shareholders.

Primary Health Properties (LSE:PHP) is a REIT that I think is particularly interesting.The company has managed to grow its dividend each year for 27 consecutive years, making it a Dividend Aristocrat.

This means the company’s business model of focusing on primary care facilities has stood up well in various economic environments. Even during the pandemic, distributions to shareholders went up.

The company has a lot of debt on its balance sheet and this is a risk for shareholders to be aware of. Refinancing this at higher rates could cut into earnings and threaten the firm’s consistent growth. 

As a result, I’d say the 6.7% dividend yield comes with greater risk than Aviva’s preferred shares. But there’s also better scope for growth and the company’s record indicates that it’s much more resilient than most.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Passive income

When investing in stocks and shares, some degree of risk is inevitable. But not all investments are alike when it comes to the possibility of things going wrong. 

Some, like Aviva’s preferred shares, have a status that insulates them from minor fluctuations in the business. Others, such as Primary Health Properties, have a business model that can hold up in difficult situations.

For investors looking for passive income, I think considering these types of investments could be a good idea. Over the long term, these could work out very nicely in a Stocks and Shares ISA.

The post I’d use a Stocks and Shares ISA to invest in low-risk equities and let the passive income roll in appeared first on The Motley Fool UK.

I’ve been adding to my stakes in two dividend stocks lately. And I’m planning on continuing to do so if prices stay where they are.

Aviva

I’ve been adding to my investment in Aviva (LSE:AV.B) shares. I’m not talking about the common stock, though – I own the preferred equity. 

Right now, the dividend yield on the preferred stock is 7.21%, compared to 7.69% for the common equity. Furthermore, the preferred dividend is fixed and isn’t going to grow over time.

So why am I buying the shares with the lower return? The answer is stability. 

From an income perspective, there’s always a risk dividends can be lowered or suspended entirely. But that risk is significantly lower with preferred shares.

With the way Aviva’s shares are structured, it can reduce or suspend its common equity dividends while still paying dividends to preferred shareholders. But the reverse isn’t true. 

Aviva can pay dividends to common shareholders only once it has paid dividends to owners of its preferred shares. That means the preferred stock is less risky from an income perspective.

When comparing a 7.21% dividend with a 7.69% dividend, I think the lower current yield is worth the reduced (but still present) risk. That’s why I’ve been adding to my stake in Aviva’s preferred shares.

Kraft Heinz

The other stock I’ve been buying is Kraft Heinz (NASDAQ:KHC). The stock is listed in the US, which isn’t ideal, but I’m a believer in casting a wide net when it comes to looking for stocks to buy.

Since it has nothing to do with AI, investors have been going off the stock. That’s fine by me – I’m very happy buying shares at lower prices.

The stock might be out of fashion, but demand for the packaged food company’s products is still pretty solid. At its last earnings report, it announced a 7.3% increase in sales.

That’s not a big surprise – people don’t stop eating even when there might be a recession coming. But of the big food companies, I think Kraft Heinz has the most potential.

At the moment, the stock has a dividend yield of 4.3%. And while that hasn’t increased for a few years, I see potential for higher returns in the future.

One reason for this is inflation is starting to subside in both the UK and the US. While Kraft Heinz has some ability to pass this on, it has been weighing on margins to a degree. 

Another reason is the company’s balance sheet is improving. With debt coming down, I think there might be scope for additional returns in future either via dividends or share buybacks.

Dividend stocks

As investors see potential in AI stocks like Microsoft and Nvidia, prices elsewhere are becoming more attractive. I think there are a number of good opportunities in dividend shares right now.

With Aviva and Kraft Heinz, I I have two investments that I expect to provide me with passive income for a long time to come. That’s why I’ve been buying them recently.

The post I’m using the AI hype to boost my passive income appeared first on The Motley Fool UK.

This is a pretty respectable return, in my book, but I think I can do better. There’s a stock I’ve been buying (and intend to keep buying) that I expect to produce more than 7% per year going forward.

Market-beating returns

At today’s prices, I reckon that Aviva (LSE:AV.B) shares are good for a 7% return from here on. But it’s not the common equity I’m looking at – it’s the preferred stock with the ticker LSE:AV.B. 

The Motley Fool has a great explanation of the difference between the two here.

Why do I think this going to outperform the FTSE 100? Each share pays a dividend of 8.375p per year and is currently on sale for £1.19 today.

This implies a dividend yield of 7.04%, which is a little higher than the 6.89% the index has averaged over the last two decades. So the stock is priced today for a slightly better return than the FTSE 100. 

Furthermore, that return is fixed. It isn’t going to go up in the future (so the stock wouldn’t be suitable for an investor looking for significant growth) but I think it’s a great choice for a steady 7% return.

Of course, beating the market isn’t guaranteed – the index might do unusually well over the next 20 years. But I don’t think this is likely with interest rates at their highest levels since 2008 and continuing to rise. 

Dividend cuts

The usual concern with dividend stocks is there’s a danger that the dividend might be lowered or even stopped entirely. Persimmon shareholders have been finding this out lately.

With Aviva’s preferred shares, though, the risk for this happening is lower than it is with common stocks. Dividends for preferred shares have to be paid in full before any dividends can be paid to common equity holders.

Even if the company doesn’t pay dividends to preferred or common shareholders, it’s still not the end of the world. Missed payments to preferred owners have to be paid in full before common stock dividends can restart.

I see insurance as an inherently uncertain industry. This is especially true with life insurance, where a misjudgement in underwriting can lead to losses that really stack up over time.

That’s why I’d rather own the preferred shares than the common equity. The additional security of preferred stock goes some way towards offsetting the risk that comes with investing in the sector.

A stock to buy

I’ve been buying Aviva’s preferred shares for some time and I intend to keep doing so. The stock isn’t the most exciting, but a steady 7% return is attractive to me.

The biggest danger with it is the possibility of the price falling. Trading volume is low and it might be hard to sell it at a decent price – or even at all – if the price goes down significantly.

I don’t see this as major issue, though. In the case of Aviva, I’m not anticipating selling the stock at any point in the future – I’m looking to hold on to it and hopefully keep collecting a 7% return. 

The post I’d buy this stock to try and beat the FTSE 100 appeared first on The Motley Fool UK.

If I were about to retire, I’d be looking for companies with high dividend yields and relatively stable outlooks. In this regard, two UK shares stand out to me at the moment.

Legal & General

If I’d invested £1,000 in Legal & General (LSE:LGEN) in 1999, I’d have an investment today with a market value of around £1,230. In other words, the share price has increased by an average of under 1% per year.

That’s because most of the return has come from its dividends. At today’s prices, it has a yield of around 8%. 

The company has also shown a responsible attitude towards its dividend over the last few years. It has increased it when it was able to, but took a pause during the pandemic to reassess the situation.

Things have been going well for Legal & General recently. Rising interest rates have allowed it to earn a stronger return on its assets and this trend looks set to continue, according to the company’s management.

There are always some risks when it comes to investing. In the case of Legal & General, the biggest of these comes from a change in CEO as the company’s highly respected leader steps down.

Overall, though, this looks like one of the most dependable income stocks for the near future. I think it could be a great choice for retirees looking for passive income.

Aviva

Aviva (LSE:AV.B) is another insurance company with a high dividend yield. But unlike Legal & General, I’m looking at the preferred stock, not the common equity.

Warren Buffett has invested in preferred shares at various times in his career. And it’s not that difficult to see why – they offer a much lower risk proposition than common stocks. 

Payments to preferred shareholders have to be paid in full before common shareholders can receive any distributions. This means there’s less chance of preferred dividends being cut or lowered.

Of course, Aviva could pay no distributions to its shareholders at all – either preferred or common. But if it did, then missed payments on preferred shares have to be caught up in full before common equity dividends restart.

The risk with preferred shares is twofold. Their dividend payments can’t go up if the company does well and they can often have much lower trading volumes, making them difficult to sell.

Aviva’s preferred stock currently has a 7% dividend yield, though, which I think is attractive enough as it is. And for a retiree looking to keep the shares and collect passive income, selling difficulties don’t matter that much.

Investing for retirement

Each of the stocks I’ve highlighted here is in the insurance sector. Ideally, I’d like to diversify my holdings a little more.

As I see it, though, owning shares that offer reliable returns is the most important thing. And these are the shares with the combination of stability and high returns I’d look for if I were about to retire.

The post 2 top dividend stocks for retirement appeared first on The Motley Fool UK.

The company is Aviva (LSE:AV.B). But I’m not talking about the common equity – I’m looking at the preferred stock.

Dividends

Right now, Aviva’s 8.375% preferred equity trades at a price of £1.18 per share. It pays a dividend of 8.375p per year, which is a 7% yield. 

Normally, there’s a risk with dividends that the payouts might be lower in the future. But that’s much less likely with Aviva preferred shares than most common equity investments. 

The dividend is fixed – meaning that it can’t go up or down. And it has to be paid in full to investors before owners of common equity can be paid dividends.

In other words, if Aviva has a bad year or two and there isn’t enough cash to go round, owners of the preferred stock get paid first. That goes some way toward reducing the risk of a dividend cut.

There’s a chance the company might suspend its dividends entirely – and that netiher preferred nor common shareholders get anything at all. Even then, I’d rather own the stock with the fixed dividend.

If Aviva pays nothing at all for a year, the preferred share dividends accumulate. In other words, missed payments have to be made in full to shareholders before common stock dividends restart.

Risks

I think the risks with Aviva preferred is low relative to stocks. But there are a couple of ways in which I might live to regret opting to buy the shares.

The most obvious reason is if the underlying business grows significantly. As a preferred shareholder, I won’t receive anything extra in dividends if the company does well.

Right now, Aviva’s common shares have a dividend yield of 8%. If that goes up (or even stays where it is) in future, I’ll do worse as a result of having bought the preferred.

I’m not buying this stock because I think it’s going to have the biggest return on the stock market, though. I’m buying it because I see it as a relatively low-risk way of earning a 7% return.

Another way in which this could turn out to be a bad decision is if I have to sell the shares. The preferred is less liquid than the common equity, so I might be unable to get rid of it if I need the cash.

This is a risk that I can protect myself from, though. As long as I stick to only investing money that I won’t need in the near future, I can avoid the issue of having to sell the stock at all. 

A stock to buy

I own Aviva preferred shares in my investment portfolio. At today’s prices, I see it as a good way to earn a steady 7% return. 

If the share price increases, I might not be able to reinvest my dividends at a 7% return. But there are worse problems to have than the market value of a stock I own going up.

The post I’d buy this UK stock today for a 7% return appeared first on The Motley Fool UK.

It’s almost impossible to tell what share prices will do on any given day. But there are three stocks I’m buying now because I doubt I’ll get a better opportunity for another 10 years.

Aviva

Top of my list is Aviva (LSE:AV.B). But it’s the company’s preferred equity that’s catching my eye right now, rather than the common shares.

I think this is a relatively predictable investment. Unless something goes drastically wrong with the business, the stock is going to return 8.375p in dividends per share each year. 

At a price of £1.18, that’s a 7% return. I’m looking to lock that in right now, because I think it offers a decent return with less risk than most stock market investments. 

If interest rates rise faster than the market expects, then there’s a risk the share price will fall. But I’m not convinced that’s going to happen.

As a result, I’m looking to take the return on offer today, rather than guess at the future. If interest rate increases slow down, I might not get a better shot at this one.

Diploma

I also like the look of FTSE 250 stock Diploma (LSE:DPLM). The company is growing rapidly and I’m not convinced I’ll see it at a lower price than it is right now in the next decade.

The stock doesn’t look cheap at today’s prices. The shares trade at a price-to-earnings (P/E) ratio of 35, meaning that decent returns depend on significant growth in the future.

I think this is likely to happen, though. Diploma aims to increase its revenue and profits by organic growth and through acquisitions.

In fact, the company closed an acquisition earlier this month. And with 700 further deals under consideration, I think the future looks bright here.

That’s why I’m not afraid of the high P/E ratio. I think there’s a long way to go before the growth subsides I expect the shares to be worth a lot more by then.

Bank of America

Lastly, I’ve been buying shares in US-listed Bank of America (NYSE:BAC). Warren Buffett seems to love the stock and I think it’s trading at a good price at the moment.

Put simply, I think that the bank is in decent shape. But the stock market is pricing it like a business in trouble, making it look like a bargain to me.

I’m not expecting another banking crisis in the next 10 years (though I’m not ruling one out). So I’m not counting on seeing the stock at these prices again.

The biggest risk for Bank of America shares right now, in my view, is the possibility of tighter regulation. That might impede the company’s profitability going forward.

I’m not convinced this is likely, though. Even if tighter regulations are coming, I think they would likey have a greater impact on smaller players, rather than Bank of America – and if I’m right, this is a rare buying opportunity.

The post I’m looking for once-in-a-decade opportunities in the stock market recovery appeared first on The Motley Fool UK.

The FTSE 100 and S&P 500 are significantly higher than they were at the start of the year. As a result, dividend yields are down.

This means that investors looking for passive income have a few options. One is look for riskier stocks in order to find higher dividend yields.

I don’t like this approach, since I try to avoid risk when I’m investing. Prioritising a high dividend payment in the short term looks like a strategy that is likely to backfire over time.

Another option is to take lower returns by sticking to quality investments. I’d prefer this to the previous strategy over the long term, but I think there’s a better alternative.

The third choice is to look for investments outside of common stocks. This is where I see an interesting opportunity at the moment.

Preferred shares

With share prices high, I’m looking at preferred stock as a viable alternative. Warren Buffett has used these effectively throughout his investing career and I think they can be successful for me, too.

Unlike common equity, preferred shares pay a fixed dividend. That gives investors like me a better chance of knowing exactly what return they’re going to get on their investment.

Preferred shares also get priority regarding dividends. In other words, if a company’s earnings drop, dividends to preferred shareholders must be paid in full before common shareholders receive anything.

As a result, preferred shares are less uncertain than common shares. The downside to preferred equity is that holders of preferred shares don’t stand to benefit if the underlying business does well.

If a company makes more money year after year, common stock dividends are likely to go up. Dividends to preferred shareholders don’t do this — the cost of priority status is that there’s no growth.

A preferred stock can therefore be a good investment, since it’s likely to pay dividends consistently over time. But it needs  to have a big enough dividend yield today.

Aviva

The stock on my list to buy is Aviva 8⅜% CUM IRRD PRF #1 — the preferred stock of Aviva. I think the return on offer today is an attractive passive income opportunity.

Aviva’s preferred shares pay a dividend of 8.375p per share. And the share price is currently £1.29, implying a dividend yield of 6.5%. 

With the stock market where it is, I think a 6.5% dividend with the additional safety of a preferred stock is an attractive opportunity. That’s why I’ve been buying the stock for my portfolio.

There’s another bonus to Aviva’s preferred shares. They’re cumulative, so if the dividend is ever cut entirely, then missed preferred dividends have to be caught up before common stock dividends restart.

The biggest risk I can see with the stock is that they’re less liquid than common stocks. If the share price crashes, then I’ll find it more difficult to sell the shares.

I’m okay wih this, though. Since I’m looking for passive income, my ambition isn’t to sell the shares. It’s to keep them and continue receiving dividend payments indefinitely.

The post 1 dividend stock I’m buying for lifelong passive income appeared first on The Motley Fool UK.

If I were looking to give my passive income a boost, I’d be looking at buying the company’s preferred stock, which is known as AVIVA 8 3/8% PF 8 3/8% CUM IRRD PRF #1 (LSE:AV.B).

I think that preferred stock would be a better investment for me than the common shares if I were looking to boost my passive income. The reason for this is mostly to do with managing risk.

Preferred stock dividends

Aviva’s preferred stock pays a fixed dividend of 8.375p per share each year. So in order to receive £100 in passive income, I’d need 1.194 shares.

At today’s prices, that would mean an investment of £1,368. But for a stock with a dividend yield of just over 7%, I think it’s an attractive proposition.

A high dividend yield can sometimes be an indication that investors are expecting the dividend payments to be cut. But I think that this risk is somewhat limited in the case of Aviva’s preferred stock.

Two features of the preferred stock limit the risk of a dividend cut. The first is that the preferred stock dividends have to be paid before any dividends are paid to common stockholders.

Nonetheless, there is still a risk that Aviva might decide to cut its dividend. But if this happens, then the missed payments for the preferred dividends accumulate and have to be paid in full before common equity dividends can be reinstated.

Reinvesting

I intend to reinvest the dividends that I receive from this investment. This means that I think I can do well whether the share price goes up or down.

If the price goes down, then I’ll be able to reinvest my dividends at a higher rate of return. Since the dividend is fixed, a lower share price will mean a higher dividend yield.

On the other hand, if the share price goes up, then the return I’ll get by reinvesting will go down. But in that situation, I’ll be able to realise a profit on my investment by selling part of it.

Of course, if the share price stays the same, then I’ll continue to reinvest my dividends at a 7% return. As a result, I think that I can do well with Aviva’ s preferred stock whatever happens to the share price.

A stock to buy

I think that Aviva preferred shares are a great dividend stock for an investor like me. That’s why I already own them in my portfolio.

In order to keep my investments balanced and diversified, it will probably be some time until I get to owning 1,194 shares. But if I were looking to give my passive income a boost, I’d buy the stock today.

The post I’d buy 1,194 shares of this UK dividend stock for £100 in passive income appeared first on The Motley Fool UK.

If I had money to invest right now, I’d be happy buying any of these stocks at today’s prices. I think they represent great value and could provide solid returns over time.

Kraft Heinz

My first stock is Kraft Heinz. It’s one of Warren Buffett’s biggest investments and I think that it’s one of the most misunderstood.

It’s easy to write off this stock. Shares in Kraft Heinz are down more than 50% over the past five years and the company’s revenue growth has been almost non-existent over the past decade.

In my view, the underlying business has been making significant improvements recently. The company’s long-term debt has reduced by 25%.

As I see it, the market hasn’t yet picked up on this one. That’s why I’ve been buying the shares for my portfolio and anticipate continuing to do so.

Citigroup

Another Buffett stock in my portfolio is Citigroup. The stock has fallen by over 27% since the start of the year.

As a result, the shares currently have a 4.5% dividend yield. And the shareholder returns don’t stop there.

Over the last five years, the company has been repurchasing 6% of its shares per year. That’s a welcome boost for me as an investor.

A prolonged economic downturn might prove challenging for Citigroup. But I think it’s priced to reflect this, so I expect to reinvest the dividend that I’ll receive this month.

Aviva 8 ⅜ PF 8 ⅜ CUM IRRD PRF #1

I’m also attracted to Aviva 8 ⅜ PF 8 ⅜ CUM IRRD PRF #1. The complicated-sounding security is preferred stock in Aviva.

It pays a fixed dividend, which makes it a bit more predictable than the common stock. At today’s prices it offers a return of 7.5%. 

The risk with the preferred stock is that it isn’t traded as much as other common shares. If I change my mind about owning it, I might find it difficult to sell.

But I don’t buy shares to sell them again quickly. My plan with Aviva’s this is to just sit back and collect dividends.

Realty Income

Realty Income is a comparatively simple stock to understand. The company owns retail properties and rents them out to tenants.

As a Real Estate Investment Trust (REIT), it distributes 90% of its rental income to its shareholders via dividends. At the moment, it has a yield of 4.78%.

It’s down around 12.5% this year due to rising interest rates. While I don’t think investors are missing anything obvious with this one, I’d buy it at today’s prices.

Rising interest rates are a headwind for Realty Income on two fronts. They make the cost of debt more expensive and drive down the value of property prices.

None of this worries me, though. Realty Income has increased its dividend quarterly for the past 25 years, which tells me the company has seen rising interest rates before and come through ok.

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