Generating an 8% yield from a passive income portfolio means getting an annual income of £800 for every £10,000 invested. It’s a tough target in today’s market, where the average dividend yield on the FTSE 100 is just 3.4%
However, I’ve found three companies with 8% dividend yields I’d trust enough to buy today. Indeed, I already own two of them. Although dividend payments are never guaranteed, my analysis suggests that each of these payouts looks safe, based on current trading.
A sin stock I’d buy for income
British American Tobacco (LSE: BATS) is undeniably a sin stock. This £62bn FTSE 100 stock is one of the largest tobacco companies in the world and sold nearly 640bn cigarettes in 2020.
Ethical concerns aside, this business is also a profit machine that generated £7,295m of surplus cash last year. Of this, £4,745m was returned to shareholders as dividends.
The attractions of tobacco stocks are well known. High profit margins, strong brands, and very loyal customers.
One less obvious risk for BATS shareholders is that the group has opted to maintain its generous dividend, rather than divert cash to speed up the repayment of its £40bn debt mountain.
A second concern is that we don’t yet know if the company will be able to replace profits from declining tobacco sales with earnings from more modern products, such as vapes.
Even so, I’d be happy to buy BATS shares at current levels. Trading on eight times earnings with a well-covered 8% dividend yield, this is a stock I view as good passive income.
Back on the road
A well-run insurer will often generate plenty of cash. In a mature market like the UK, growth opportunities are limited by competition, so large insurers like Direct Line Insurance Group (LSE: DLG) generally pay quite generous dividends.
I’ve owned Direct Line for some time, throughout which the shares have provided me with a reliable 8% dividend yield. Although the share price has been pretty flat, I’ve been happy to receive almost all of my returns in the form of passive income.
I think the insurer’s growth may also improve over the next 18 months. Direct Line has just finished a major technology upgrade that’s designed to improving its risk pricing. Early results are said to be encouraging.
Direct Line shares offer a 2021 forecast yield of 7.8%. Broker forecasts suggest this will rise to 8% in 2022. I may buy more for my portfolio.
Passive income from housing
I don’t invest in property directly, but I do like to own some housing and property stocks for income. One company in my portfolio at the moment is FTSE 100 housebuilder Persimmon (LSE: PSN).
Shares in this York-based company offer an 8% yield that’s backed by £1.3bn of net cash, and an order book worth more than £2bn.
Persimmon’s profits may be squeezed slightly by rising labour and materials costs. But the only serious risk I can see to the dividend at the moment is that a housing market slowdown will cause sales to fall sharply.
I expect this to happen at some point in the future. But I can’t see any evidence it’s likely to happen soon. Mortgages are very cheap, wages and employment are stable or rising, and demand for new homes appears to be strong.
Until this situation changes, I plan to continue holding Persimmon as a passive income investment.
