One way I can make passive income is via dividend stocks. By holding stocks from a variety of areas, I can build a robust and diversified portfolio that pays me regular dividends. At the moment, here are the areas within the stock market that I think hold the most potential.
Building brick by brick
I wrote yesterday about two stocks within the property sector. These were Taylor Wimpey and Persimmon. The dividend yields from these (and other) companies within the property sector look appealing right now. Why is this?
Firstly, the dividends are being paid from what has been a good past 18 months in the industry. Although the pandemic paused building for a short period, it’s a sector that hasn’t really seen a large setback due to Covid-19. In fact, companies in this area have benefited from rising property prices. This has boosted homebuilders, as well as estate agents (both traditional and online businesses).
Therefore, dividends are being paid out from the profits. If this momentum continues, I don’t see any reason why this area won’t be a source of great passive income into 2022.
One risk for this area is rising interest rates. This will make mortgages more expensive, and could cause the market to stumble as fewer people would be able to afford to get on the property ladder.
High passive income from financial stocks
A second sector for passive income that I like is financial services. Examples include Phoenix Group and Legal & General. Both currently offer me a dividend yield above 6%.
I like that this sector offers me quite low volatility. Some would call these stocks boring, but I prefer the word consistent! The nature of most financial services is that work is fee-based, either upfront or generated from the assets held under management over time. It’s a business model that has worked for many, many decades, and I don’t think that will change any time soon.
The durability of these companies gives me confidence that the dividend policy won’t change substantially year-by-year. This should aid my planning for future passive income.
A risk is that, as we saw back in 2008, ties with financial companies can cause problems. If one bank or insurance company has problems, it can have negative ripple effects on other companies in the sector due to loans, underwriters or other similar connections.
A defensive sector
The final area worth considering is supermarkets. Two I like are Tesco and J Sainsbury. The yields in this area are lower on average than the above two sectors. However, I think it’s a low-risk area for passive income going forward.
Supermarkets should be able to pay me consistent dividends as the products sold are in demand throughout all stages of the economic cycle. This is one of the few areas that does show that kind of consistency.
At the moment, I do need to keep an eye on risks though. Supply chain disruption threatens to cause problems for the festive season. Even with high customer demand, if the businesses can’t get products into the shops, it can’t sell them.
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Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Tesco. 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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