Buying dividend stocks isn’t the only way that Brits can try and make a passive income.
Investing in property; starting a vending machine business; even wrapping one’s car in advertising are just few wealth-building opportunities that have dropped into my inbox recently.
But I’m not interested in any of these ideas. I believe that investing in FTSE 100 and FTSE 250 shares is the best way to build a second income over time.
Now’s a particularly good time to go shopping for dividend shares, too. Years of underperformance mean that the dividend yields on many top stocks are enormous.
Here are three I think income investors should consider today.
8.1% dividend yield
Dividends are of course never guaranteed. But City analysts expect past dividend heroes M&G (LSE:MNG), Legal & General Group (LSE:LGEN), and National Grid (LSE:NG.) to continue delivering market-beating payouts to their shareholders.
Their huge dividend yields are shown below.
| Dividend yield | |
|---|---|
| M&G | 10.1% |
| Legal & General | 8.6% |
| National Grid | 5.5% |
| Average | 8.1% |
If City forecasts prove accurate, a £20,000 investment spread across these shares could give me a £1,620 passive income over the next 12 months. Not bad, right?
I’m confident, too, that each of these FTSE 100 shares will steadily grow their dividends over time. Here’s why I think they’re top investments.
Two top stocks
Buying M&G or Legal & General shares is more risky than usual at the moment. When consumers feel the pinch, demand for discretionary financial services tends to decline.
This has certainly been the case for these two Footsie shares of late. It may remain a problem going forwards, too, if interest rates remain at or around their current levels.
However, this shouldn’t impact either companies’ ability to continue paying above-average dividends. Even if earnings disappoint, both businesses have cash-rich balance sheets they can use to deliver more big payments.
Legal & General’s Solvency II capital ratio, a measure of liquidity, was 224% at the end of December 2023. M&G’s, meanwhile, was also north of 200% (at 203%) at the close of March.
Both businesses face extreme competitive pressures. But the rate at which demand for retirement and wealth products is rising — driven by rapidly ageing populations in the West — means I still expect them to keep delivering large and growing dividends beyond the near term.
Power up
I also expect National Grid to remain a top passive income share beyond this financial year.
One reason is that it is investing heavily to decarbonise the electricity grid. This should provide significant profits opportunities as the number of renewable energy projects steadily grows.
The power grid operator’s excellent defensive qualities also make it a dependable provider of market-beating dividends. Its services are essential at all points of the economic cycle. And under the current regulatory regime it has a monopoly on what it does.
National Grid grabbed headlines last month when it launched a new rights issue and rebased the dividend. The company’s green growth strategy is hugely expensive, and taking on more debt or issuing more shares to fund it are a constant danger.
However, the long-term rewards of this strategy are massive, and could cement the company’s position as a great dividend stock for years to come.
