When looking for dividend shares to buy for my portfolio, I like to focus on what I believe are the market’s highest quality companies. Ultimately, I am looking for corporations that can provide my portfolio with a passive income stream.
I believe the number of enterprises on the market that can produce a reliable passive income stream is tiny. These businesses have to exhibit a couple of qualities if they are to make it into my portfolio.
The best passive income shares to buy
First of all, they have to have a solid competitive advantage. This should help them stay ahead of the competition and earn market-leading profit margins, which will ultimately support their dividend payout to investors.
Secondly, the best dividend shares to buy for my portfolio must have a strong balance sheet. These companies have more financial flexibility and do not have to worry about meeting their obligations to creditors when the times are tough. This could mean the dividend is more sustainable.
The final quality I am looking for in passive income stocks for my portfolio is a track record of shareholder returns. Past performance should never be used to guide future potential, but it can be a good indicator of a company’s intentions. This is something I try to take into account when analysing potential investments.
Here are three dividend shares yielding 7% or more that I would buy from my portfolio today. I believe all of these companies meet the passive income criteria I have outlined above.
My favourite dividend shares
The first company on my list is a stock I already own. Regional REIT Limited (LSE: RGL) owns a portfolio of office properties located outside the M25.
Usually, I would steer away from real estate investment trusts with too much exposure to office properties because this market does not fall inside my comfort zone. However, Regional is headed by a strong management team with an excellent track record of finding undervalued opportunities.
For example, last year, the company sold a portfolio of industrial properties for £45m. Not only did the group manage to sell these at a near-8% premium to the valuation report at the end of 2020, but it also achieved an overall 18% increase in value from the purchase price.
By renovating some larger units and improving occupancy across the portfolio, the company was able to enhance the quality of the asset and achieve a favourable price in an unfavourable market.
Of course, there is no guarantee the organisation will repeat this success story. Rising interest rates could have an impact on property prices across the country. Demand for offices could also decline if the working from home movement persists.
Still, thanks to the company’s track record of creating value, relatively strong balance sheet, and 7.2% dividend yield, I would be happy to buy more of the stock for my portfolio. The net loan-to-value ratio at the end of September was 43%. That is a relatively modest level of gearing for any property portfolio.
Passive income champion
Another company that exhibits all of the qualities I am looking for in the best dividend shares to buy is Diversified Energy (LSE: DEC).
Usually, I would avoid the commodity sector when looking for long-term passive income investments. Commodity prices can be incredibly volatile. But Diversified Energy has an edge. The corporation hedges most of its gas production, which means management has a high level of visibility over future cash flows.
That said, the firm does still have some exposure to volatile commodity prices. If the green energy transition forces hydrocarbon prices lower over the next decade or so, the company will not be able to mitigate this risk. That is probably the biggest challenge the group faces right now.
Nevertheless, the company looks to me to be well managed. It also has a strong balance sheet supported by hedged cash flow from its hydrocarbon assets. The strategy also gives the business an edge in the market.
With profits and cash flows locked in, it can take advantage of opportunities in the commodity market its peers may have to overlook due to financing constraints. The stock offers a dividend yield of 10%, at the time of writing.
Growth through acquisitions
I would also buy wealth management group M&G (LSE: MNG). With a dividend yield of 8.5%, the stock looks attractive as an income investment. It also has great growth potential. The company is expanding its footprint by snapping up smaller wealth managers. This could help the business grow its earnings per share and provide more capital to fund dividends.
As the wealth management market is highly competitive, M&G needs to stay on its toes, or it could be left behind. This is probably the biggest risk the organisation faces right now. It needs to keep investing and developing its offering for consumers. If the company takes its market share for granted, competitors may start to draw customers away.
Despite this challenge, it seems to me as if the business is well managed, has a growth plan in place, and has a relatively conservative balance sheet.
Indeed, as it operates in a highly regulated industry, it needs to prioritise balance sheet strength. This is both a benefit and a drawback for investors. It means the company is unlikely to overstretch itself. Still, regulators could act if they think the firm is paying out too much to shareholders in dividends.
Even after taking this risk into account, I believe the company is one of the best shares to buy now for passive income.
