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What do we want from a stock that generates passive income? First, we want a good dividend to generate income. And it's passive because, well, we don't have to do any work once we've bought it.
But then I want a stock that I believe will keep its dividend growing, at least in line with inflation, over the next 10 or 20 years.
And I want it to look cheap based on fundamentals. I know a high and sustainable dividend yield can imply that. But I also want an opportunity for share price appreciation, as a side benefit.
Insurance dividends
I have always liked insurance stocks and am thinking of adding… Legal and general (LSE:LGEN) to my current Aviva tenure.
I'm fairly heavily invested in financial stocks, and that's a warning to passive income investors. Quite often, we'll see that many of the top dividends come from the same sector, and that tempts us to focus.
But I would say that diversification is more important than looking for the best dividends. So, if I buy Legal & General shares, the next thing I will do is to diversify a bit more.
Irresistible dividend?
I find the 9.2% dividend yield forecast very hard to resist. Sector dividends can be volatile, as can share prices. And that's probably the biggest risk, which can make it easy to think a stock is cheap when it may not actually be.
Still, I can handle short-term volatility, even if many investors don't like it.
And, given that forecasts suggest the price-to-earnings (P/E) ratio could fall below nine by 2026, there is plenty of safety margin in the valuation. At least for me, though not for everyone.
Very tempted
He BT Group (LSE:BT.A) The dividend really tempts me now. For years I have thought the company was paying out too much cash, while taking on too much debt.
But since the board told us that we're past the point of peak capital expenditure for broadband deployment, I'm looking at it in a new light.
The 5.5% yield is not the highest in the market and the forward P/E multiples of around 10 are not the cheapest. But both beat the FTSE 100 Index averages in their own way.
Is there enough security to overcome the debt threat? Can the stock price continue to rise since it began to rise this summer, or will the past five years of weakness continue?
I haven't decided yet, but BT is definitely on my list of possible passive income sources.
So many options
I keep thinking about National Network This is possibly the best dividend stock I have ever bought. However, I missed the big drop in May because I didn't have the cash ready.
Is the stock price still cheap now that the dividend has been diluted a bit? How confident are we that it will happen again? Those are my big questions.
Maybe I should just invest more money in City of London Investment Fundwhich has increased its dividend for 58 consecutive years, but could be fully valued compared to other bargains out there.
Oh, so many dividend stock options and so little money to go around!
