When I am looking for stocks to buy for my passive income portfolio, I try to focus on businesses with a robust competitive advantage.
I think this means they have a higher likelihood of being able to sustain and increase their dividend payouts to investors, although this is not a certainty. Indeed, as dividends are paid from company profits, there is always a risk that firms could slash the payouts if profits slump.
Despite this risk, I would buy the three stocks below as passive income investments, considering their dividend credentials.
Stocks to buy for income
The first stock on my list is the United Utilities (LSE: UU). Its control of water and related services is paramount in a highly defensive industry.
As such, there will always be a demand for United’s services. The biggest challenge the company faces is complying with strict regulations regarding pricing and investment. However, considering its long track record of working in the sector, I think United has the experience required to manage these risks.
The firm’s steady income stream means it is a dividend star. The stock currently offers a dividend yield of 4%, which is not the highest yield on the market. Nevertheless, due to the reasons outlined above, I think its dividend is one of the best on the market and deserves a place in my passive income portfolio.
Growth and passive income
Berkeley Group (LSE: BKG) is one of the UK’s most prominent homebuilders. The firm targets high-end properties, mainly in London and the South East. The average selling price of its new homes is around £770,000 compared to the UK average of £260,000.
The firm’s profits have jumped in recent years, thanks to rising home prices and higher levels of output. Management is reinvesting these profits back into new buildings and returning cash to investors.
City analysts believe the firm’s dividend yield could hit 7% this year as it returns increasing amounts of cash to investors. However, this trend may not continue in 2022. Higher interest rates and the end of the stamp duty holiday could push home prices and demand lower, curbing Berkeley’s growth.
Still, I think the long-term fundamentals of the UK housing market are strong, and this should support Berkeley’s expansion over the next few years.
Expanding market
Safestore (LSE: SAFE) currently offers a dividend yield of around 1.9%. Some investors might overlook this stock as a passive income investment due to its low yield. I think that is a mistake.
Over the past decade, the company’s payout has grown at a compound annual rate of 10% as profits have expanded. With management pursuing several additional growth initiatives to expand the group’s portfolio of self-storage facilities, I reckon this trend of dividend growth will continue.
It may have to overcome some challenges along the way. Rising property prices, higher interest rates and competition are all factors that could hurt returns. If these headwinds weigh on profit growth, Safestore’s dividend growth could slow.
Considering the company’s track record, and pipeline of growth opportunities, I believe the corporation has huge growth potential.
Rupert Hargreaves has no position in any of the shares mentioned. 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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