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No matter how good it is, investors know that passive income can never be guaranteed. This is especially true if a company is going through a tough business streak. But this is exactly why I think it makes sense to only consider backing companies that have a solid track record of returning cash to their loyal shareholders every (or almost every) year.
Passive Income Power
FTSE 100 energy supplier National Network (LSE:NG) is an obvious example thanks to its long history of paying dividends to those willing to take the risk of owning shares in individual companies. Importantly, this company has also gotten into great shape when it comes to increasing the amount of money it distributes.
Now I said “great.” I didn't say “perfect.” Investors are currently bracing for a rare cut in FY25. This follows Grid's announcement that it would raise £7bn to accelerate its transition to renewable energy sources.
As painful as this may be, the expected dividend yield is still 4.9%. That's significantly more than a FTSE 100 tracking fund. It looks like it will also be comfortably covered by the expected profit.
As a utility, National Grid also strikes me as a relatively safe option if (and that's a big 'if') the UK economy struggles in 2025. After all, we all need access to electricity.
By owning their shares, investors will get paid for this dependence.
Defensive dividends
Another top-tier titan that offers a compelling combination of reliability and growth when it comes to dividends is the defense company. BAE Systems (LSE: Bachelor of Arts). We're talking year-over-year increases going back decades.
Frankly, I'd be surprised if this didn't continue. Geopolitical concerns have only increased as the conflict between Ukraine and Russia drags on, pushing nations to increase their spending budgets to protect themselves. Viewed purely from an investment perspective, it is great news for the sector and BAE has been busy signing contracts all over the place.
So what's the problem? Well, the expected return for 2025 sits at a fairly high average of 3%. Interestingly, the stock is also down 13% in the last month. I suspect some of the latter may be due to management sticking to previous earnings growth guidance in its latest trading report.
However, as a more reliable source of passive income than most to keep “forever”, I think this requires some overcoming.
Monster performance
To further diversify income, investors should consider purchasing a financial services provider. Legal and general (LSE: LGEN). This offers the highest expected return of the three stocks mentioned here: a monstrous 9.4%. With equal positions, this would give us a very good average return of 5.8% on the three stocks!
Of course, there is no such thing as a free lunch. A key risk here is that Legal and General is more exposed to macroeconomic concerns than the other two. As proof of this, it was forced to cut off its dividend flow with the knife during the great financial crisis.
On a positive note, we have had consistent dividend growth in the 15 years since. And I just don't see the administration wanting to alter this trend, especially if the UK economy has a healthy 2025.
On top of this, there should be more demand for shares as interest rates fall and cash savings become less attractive.
