With private sector rentals up 5.7% over the last year and inflation sticking at 6.3%, earning passive income has never been more important. Fortunately, I think there are some good opportunities for UK investors.
Dividend stocks, for example, allow people like me to own businesses and receive a share of the profits. And the FTSE 100 has some companies that I think can keep on performing even when the going gets tough.
Unilever
Unilever (LSE:ULVR) is the kind of business that does keep doing well even when things are tough. People still eat and clean in a recession, so demand for the company’s products tends to be stable.
There’s a risk with this type of business that higher input costs can cut into profitability. And with inflation in the UK above 6%, there’s a threat to margins that investors ought to take seriously.
Unilever has more resources for fending off the threat of inflation than most, though. The firm’s strong brand portfolio gives it a degree of pricing power when it comes to passing through costs.
It’s also worth noting that the company has an impressive record as a source of passive income. It has been through downturns and recessions before and continued to distribute more money to shareholders.
BAE Systems
Another stock with an excellent dividend record is BAE Systems (LSE:BAE). As a defence contractor, the company has a number of attractive attributes.
First, demand for its products doesn’t typically follow the economic cycle. It responds to wars and conflicts, which don’t usually have anything to do with GDP growth.
Second, national security products are both complicated and expensive to make. This means it’s difficult for new entrants to compete and allows the company to negotiate long and lucrative contracts.
The major risk with BAE Systems is political. The business supplies both Saudi Arabia and the US and there’s a question of whether this is sustainable given their differing political outlooks.
At the moment, though, the company has a significant order backlog. Given this – and the ongoing conflicts around the world – I think it’s going to be a steady source of passive income for some time to come.
Pets at Home
Last on my list is Pets at Home (LSE:PETS). Like Unilever and BAE Systems, the FTSE 250 stock has a strong record when it comes to dividend increases.
In some ways, that’s hardly surprising. Even in a downturn, people continue to look after their pets – in some cases, better than they look after themselves.
The risk with this stock is that demand might be steady, but growth is unlikely to be spectacular going forward. Management warned investors of this back at the annual meeting in May of this year.
I see this as a sign of resilience, though. Against a difficult economic backdrop, the business isn’t forecasting any meaningful decline in profits, which isn’t true of a number of other companies.
Stocks to buy?
Each of the companies mentioned above has a great record of continuing to pay dividends during a recession. The trouble is, this isn’t a big secret.
As a result, none of the stocks looks like it’s trading at a really good price right now. I’m keeping them firmly on the list for the future, but I’m looking for opportunities elsewhere at the moment.
