With interest rates at record low levels, finding somewhere to earn a good return on my money is quite challenging. However, I believe there are plenty of opportunities to make a passive income with dividend investments. I even own a handful of stocks which offer dividend yields of more than 7%.
That being said, dividends should never be used as a supplement for regular income. These payouts can be cut at a moment’s notice, so investors should always choose carefully when picking income investments.
Still, I think the companies outlined below have the potential to produce a passive income for me with their 7%+ dividend yields. I would be happy to invest a lump sum of £10,000 in all four to generate a potential income of £700, or more, a year.
Passive income investments
Two high-yield stocks I already own in my portfolio are British American Tobacco and Direct Line Group. Shares in the former currently support a dividend yield of 8.5%, while the latter yields 7.5%.
I can understand why the market has pushed these yields to such high levels. Direct Line is quite complex to understand. There are many moving parts in the insurance business, and a sudden increase in losses could force the company to cut its distribution to investors.
Meanwhile, as one of the world’s largest cigarette producers, some investors may not want to touch British American with a barge pole. Health issues caused by smoking and regulations mean the company has to fight off threats continually.
Nevertheless, I own both because I believe their payouts are sustainable, based on their cash generation. British American’s investments in its reduced-risk products could help the organisation navigate the risks outlined above. And Direct Line is focusing on diversifying its business model into different types of insurance and automotive repairs.
I think these changes increase their attractiveness. That is why I already own these stocks and would not hesitate to buy more.
Booming market
Two other companies I would buy with yields exceeding 8% are Persimmon and Plus500. Persimmon’s profits are booming as property demand and prices rise, thanks to the structurally undersupplied UK housing market. With its size and scale, the group can achieve substantial profit margins, which it can then pass on to investors through dividends.
Plus500 has a leading position in the market for financial derivatives. This business model is highly cash generative and, by diversifying into cryptocurrencies, the group has only increased its product range for consumers, further reinforcing its presence in the market. I think this growth should continue to underpin the company’s dividend.
Some challenges the two companies could face going forward include cost inflation for Persimmon and competition for Plus500. Both of these headwinds could hurt profit margins and potentially cause a dividend reduction if costs increase substantially.
Even after taking these risks into account, I believe Persimmon and Plus500 are two of the best passive income investments with dividend yields of more than 8% for me to buy today.
Rupert Hargreaves owns shares of British American Tobacco and Direct Line Insurance. The Motley Fool UK has recommended British American Tobacco. 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.
This post was originally published on Motley Fool
