Why are dividend shares among my favourite passive income ideas? Partly it is that I like the prospect of benefiting from the efforts of large, proven businesses. Another reason is that the income really is passive. I can just buy the shares, sit back and wait, hoping for the dividends to start coming in. I do not even need a huge amount of money to start doing that.
If I had £350 and wanted to invest in dividend shares to set up passive income streams today, here are two I would consider buying.
NatWest
Banking giant NatWest (LSE: NWG) currently offers a 4.7% dividend yield. This means that if I invested £175 in the shares today, I would hope to receive annual passive income of around £8 in future.
With a collection of famous names such as Royal Bank of Scotland and NatWest itself, the group has a lot of personal and business banking customers. I therefore see it as a rough proxy for the health of the economy. When times are good economically, it ought to do well. But if there is a recession and loan defaults increase, then that could hurt profits.
One of the reasons I like NatWest as an option for my portfolio is that I think it continues to offer good value. The dividend has been restored and there is room for it to increase in future. As the government continues to sell down its large stake, there is also the opportunity for the bank to buy back some of those shares and cancel them. A buyback was recently announced. When shares are cancelled, earnings are not affected but the number in circulation falls. So that boosts the bank’s earnings per share.
M&G
Another of the passive income ideas I have put into action in my own portfolio this year is buying shares in investment management firm M&G (LSE: MNG). If I was looking for growth, this share would not be high on my watchlist. But as an income pick, I like certain of its characteristics.
First is the yield. At over 8%, this stock has one of the higher dividend yields on offer right now among FTSE 100 shares. If I put £175 into its shares today, I would be looking at prospective passive income of just over £14.
The second thing I like about M&G as an income choice for my portfolio is its strategic commitment to maintaining or increasing dividends. In reality that is not guaranteed to happen. But the fact that management publicly aims to maintain the payout at its current level appeals to me.
Finally, and crucially, I think the business is strong enough to support future dividends. One risk is whether an economic downturn leads to clients withdrawing funds. That could hurt revenues and profits. But with its well-known brand name in the industry, I think M&G has the ability to continue making strong profits in future.
My move on these passive income ideas
With the annual ISA deadline just days away, I have been thinking about how to use my Stocks and Shares ISA allowance to boost my passive income. I would consider buying NatWest and more M&G stock for my ISA, even with just £350 to spend on them.
