There are many ways to generate a passive income. However, acquiring dividend shares is one of the most straightforward. And it doesn’t require as much capital as other strategies, such as buy-to-let investing.
So, with that in mind, here are three dividend shares I’d buy for my passive income portfolio right now.
Passive income shares
The first company on my list is the iron ore mining group Rio Tinto (LSE: RIO). This corporation has become a dividend champion in recent years as it reduced debt and capital spending to focus on improving shareholder returns.
Should you invest £1,000 in Babcock right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Babcock made the list?
Based on the company’s current projections, and those from City analysts, the stock could yield just over 10% in 2021. A potential dividend yield of 7.3% is pencilled in for 2023. However, I should caution that these are just projections at this stage.
The company has recently benefited from rising commodity prices. Unfortunately, commodity prices can fall just as fast as they’ve risen. That’s one of the most significant risks the business faces right now. If the price of iron ore drops, Rio’s dividend may not live up to expectations.
Despite this risk, I’d buy the stock for my portfolio of passive income shares today.
Dividend shares
I think the best stocks to buy for a passive income portfolio are those businesses that have scope for dividend growth. City broker Numis (LSE: NUM) is a good example.
Over the past five years, Numis has captured an increasing share of the stockbroking market in the UK. As the group has grabbed that share, its operating profits have grown at a compound annual rate of around 7% since 2015.
Management has held its dividend steady over the same period, which means that today, the payout is covered three times by earnings. That suggests to me it’s more secure than most dividends.
Of course, such a high level of cover only suggests the dividend is more sustainable. But it doesn’t guarantee it. There are many different reasons why Numis could be forced to cut its dividend in future. Regulatory headwinds could increase costs, which would reduce profits. A stock market crash may also reduce demand for the company’s services.
However, after taking these challenges into account, I’d buy the stock and its 3.2% dividend yield today.
Portfolio power
Finally, I also like the Gore Street Energy Storage Fund (LSE: GSF), which builds and operates energy storage projects. The goal of these projects is to help the UK transition towards a greener future by building more flexibility into the electricity network.
It targets an annual dividend of 7% of net asset value per ordinary share in each financial year, subject to a minimum target of 7p per common share. This target suggests the company could be an excellent passive income investment for a portfolio of dividend stocks.
Unfortunately, just because the company has set out this target, it doesn’t mean management will meet the objective. Building energy projects is capital-intensive. If Gore Street can’t raise funds to build them, the business could struggle. Simultaneously, the firm may face increasing competition, potentially limiting returns on assets.
Nevertheless, I think the company has tremendous potential. That’s why I’d buy it for a portfolio of dividend stocks right now.
