I’m thinking of buying these cheap passive income stocks right now

I’m searching for passive income stocks for my 2024 Stocks and Shares ISA. The big problem? There are too many dividends that I like the look of.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

What do we want from a passive income stock? First we want a good dividend to create the income. And it’s passive because, well, we don’t have to do any work once we’ve bought it.

But then I want a stock that I believe will keep its dividend growing, at least in line with inflation, for the next 10 or 20 years.

And I want it to look cheap on fundamental measures. I know a sustainable high dividend yield can imply that. But I want a chance of stock price appreciation too, as a bonus.

Insurance dividends

I’ve always liked insurance stocks, and I’m thinking of adding Legal & General (LSE: LGEN) to my current Aviva holding.

I am a bit heavy in financial stocks, and that’s a caution for passive income investors. Very often, we’ll see a lot of the biggest dividends coming from the same sector, and that tempts us to focus.

But I’d say diversification is more important than chasing the best dividends. So, if I do buy Legal & General shares, I’ll next look to diversify a bit more.

Irresistable dividend?

I find the forecast 9.2% dividend yield very hard to resist. Dividends from the sector can be volatile, and so can share prices. And that’s probably the biggest risk, which can make it easy to think a stock is cheap when maybe it really isn’t.

Still, I can handle short-term volatility, even if a lot of investors don’t like it.

And with forecasts suggesting the price-to-earnings (P/E) ratio could drop to under nine by 2026, there’s enough safety margin in the valuation. For me, at least, if not for everyone.

Sorely tempted

The BT Group (LSE: BT.A) dividend really does tempt me now. For years I’ve thought the company was paying out too much cash, while shouldering too much debt.

But since the board told us we’re passed the point of peak capital expenditure for broadband rollout, I’m seeing it in a new light.

The 5.5% yield isn’t the market’s biggest, and forward P/E multiples of around 10 aren’t the cheapest. But both beat the the FTSE 100 averages in their own ways.

Is there enough safety to beat the threat from debt? Is there more to come from the share price since it started rising this summer, or will the past five years of weakness continue?

I haven’t made up my mind yet. But BT is definitely on my passive income shortlist.

So many choices

I keep thinking of National Grid as possibly the best dividend stock I’ve never bought. I missed the big dip in May, though, as I didn’t have the cash ready.

Is the share price still cheap now the dividend has been diluted a bit? How safe are we from the chance it might happen again? Those are my big unknowns.

Maybe I should simply put more money into City of London Investment Trust, which has raised its dividend for 58 years in a row. But it might be fully valued compared to some of the other bargains out there.

Ah, so many dividend stock options, and not enough money to go round!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has positions in Aviva Plc and City Of London Investment Trust Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »

Investing Articles

As like-for-like sales continue to fall, is the B&M European Value Retail SA (LSE:BME) share price a bargain?

B&M European Value Retail is known for its low prices, but could growing like-for-like sales make the share price the…

Read more »