In the last couple of years, it seems that investors have put much more emphasis on making passive income.
It makes sense. We’ve had red-hot inflation as well as high interest rates. People can either let their cash sit idle in the bank or they can put their money to work in the stock market and start making streams of extra cash.
That’s what I’ve been doing. So far, it’s paying off. Although saying that, I haven’t pocketed any of the dividend payments I’ve received from the passive income shares I own.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
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Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
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I have a simple strategy. I buy undervalued FTSE 100 and FTSE 250 stocks with meaty yields. As for the cash I receive, I simply reinvest it back into buying more cheap shares, also known as ‘dividend compounding’.
Here are two Footsie shares I think could be brilliant buys today and I’d buy them if I had the cash. One I own and the other I like the look of. I think investors should consider them.
British American Tobacco
I’ll begin with the stock that’s already in my portfolio: British American Tobacco (LSE: BATS). Its share price performance over the last five years has been disappointing. The stock has lost 17.5% of its value across that time. Zooming in makes for a better reading. The stock’s up 5.6% in 2024.
But with its beaten-down share price comes a whopping 9.5% yield. That’s comfortably over double the Footsie average. British American Tobacco has paid a dividend for over 20 consecutive years.
There’s a pretty obvious explanation for its poor performance in recent times. Smoking is a habit that’s becoming increasingly frowned upon. As such, its core cigarettes business is on the decline.
But even considering that, I really like the turnaround potential of the stock. I’m hoping the firm can put the struggles of the last few years behind it as it continues to expand its non-combustibles division.
In this, it sells products such as vapes as well as oral products like snus. Last year the division achieved profitability two years ahead of schedule.
M&G
The other stock I’m keeping a close eye on is asset manager M&G (LSE: MNG). It’s lost 7.8% of its value since it was listed in 2019. This year, it has fallen 7.4%.
However, I’m drawn in by its thumping 9.5% yield. Since listing, its payout has increased every year. While dividends are never guaranteed, management has laid out its ambition to keep this up moving forward.
I’m also bullish on the industry it operates in. Firstly, it’s massive. What’s even better is that M&G has a strong position in the sector with over 4.6m individual clients and 900 institutional clients. Secondly, the asset management industry is expected to keep growing in the years to come.
Of course, that growth will come with volatility. We’ve seen that over the last few years as its assets under management have meandered up and down due to economic uncertainty. The asset management industry can also be very competitive.
However, with strong brand recognition, I see long-term value in its shares, which trade on nine times forward earnings, below the Footsie average.
I reckon its low valuation and meaty yield could make M&G a cracking buy to think about right now.
