Although interest rates and bond yields are starting to rise, they are still low in comparison to past rates. This means that it’s important to find other sources of passive income. Dividend stocks are a great example, as some companies offer yields of around 10%. When I buy dividend stocks, I look for both healthy yields and sustainability in the payouts. These are two stocks that fit these criteria, and this makes them ‘no-brainer’ buys for me.
Rising dividend
Legal & General (LSE: LGEN) has managed to see consistent dividend growth over the past few years. In fact, the full-year dividend has risen from 4.75p per share in 2011 to 17.57p per share last year. It is expected to see further growth this year when the full-year results are announced next month. As such, it currently holds a yield of around 6.5%, far higher than the majority of other FTSE 100 stocks.
Unlike some other dividend stocks, this high yield also seems sustainable. For example, it its first-half results, the company made operating profits of over £1bn. The full-year dividend is expected to cost just over £1bn, meaning that, provided full-year profits remain healthy, there should be plenty of cash to invest into the company.
Overall, I’m also confident in the prospects of the company. This is despite the risk of a slowing economy, which could strain profits, and potentially the dividend. Nonetheless, there is currently robust demand for the company’s pension risk transfer programme and its annuities portfolio, and with the ageing population, demand seems set to increase further. Accordingly, I’m looking to add more L&G shares to my portfolio.
A renewable energy dividend stock
Due to my concerns over the future of oil, I’m staying away from oil dividend stocks, and opting for renewable energy stocks instead. NextEnergy Solar Fund (LSE: NESF) is my personal favourite. As the name suggests, this fund owns multiple solar assets around the world, yet predominantly in the UK. Recently, it has added five additional operating solar assets, taking its total to 99. This means that the total installed capacity has reached 895MW, a 10% rise since March 2021.
Personally, the biggest attraction for me is the company’s large and growing dividend. In fact, it currently yields over 7%, surpassing yields of some major oil stocks. Especially in the context of global gas shortages and climate change, renewable energy is also becoming increasingly important. Therefore, I hope that profits, and therefore the dividend, can continue to grow.
There is one major risk with the dividend, however. Indeed, it currently only has a cash dividend cover of 1, meaning that all the profits are paid out as a dividend. If profits decrease, this means that the dividend may have to be cut. It also restricts the amount of cash being reinvested into the company.
Despite this risk, I’m still confident in the future of the fund, and even if the dividend must be cut, it would still have a large yield. It would also likely be a short-term problem. As such, I’ll continue adding NESF shares to my portfolio for a passive income.
Stuart Blair owns shares in Legal & General and NextEnergy Solar Fund. 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.
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