Stocks on sale! How I’d invest £5,000 today for lifelong passive income

Is now a good time to invest in passive income shares? Our writer considers several options he thinks would do well in a weak market.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Content white businesswoman being congratulated by colleagues at her retirement party

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Plenty of shares have tumbled this year. Soaring inflation has prompted many of the world’s central banks to end an era of ultra-low interest rates. These higher borrowing costs could tip the UK into an uncomfortable recession.

As we enter this potentially trickier economic phase, I’m looking at the best passive income shares for my Stocks and Shares ISA.

20% dividend yield?

Currently, the FTSE 100 yields around 4.2%. Last year, I would have said that was pretty reasonable. But with interest rates climbing and expected to rise further, I would prefer a much larger dividend yield right now.

Should you invest £1,000 in BAE Systems 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 BAE Systems made the list?

See the 6 stocks

Thankfully, the Footsie isn’t short of high-yielding shares. The largest dividend can be had from housebuilder Persimmon (LSE:PSN). It currently offers a dividend yield of a whopping 20%. That’s enough to make £1,000 a year in passive income from my £5,000 investment.

That said, I’d be cautious about this. I reckon it’ll be difficult to sustain such a yield, and there’s a chance it could be cut significantly. That can often happen when there’s a change in a company’s earnings.

With mortgages becoming increasingly expensive, property prices could fall over the coming year. That could affect housebuilders’ earnings, which in turn could lead to dividend cuts.

Reliable passive income

So where can I find reliable dividends? I’d look to non-cyclical businesses that could continue to perform well in an economic downturn.

For instance, Imperial Brands (LSE:IMB) sells established products that are less affected by rising prices. It currently offers a 7% dividend yield that’s well-covered by its earnings.

In addition, it has a considerable track record of distributing income to shareholders, and it has been paying dividends for at least 25 years.

Its share price has risen by a remarkable 39% over the past year, but I think that’s partly due to its stable properties in times of crisis. But with a price-to-earnings ratio of just 7x, I’d still consider it to be cheap.

Bear in mind that when the economy picks up again, this stock could underperform other faster-growing options. That said, I’d still buy this share for its defensive properties.

Wind in its sails

Another reliable passive income share I’d buy is SSE (LSE:SSE). This renewable energy provider currently offers a 6% dividend yield. Like Imperial, SSE also has a multi-decade track record of paying dividends to shareholders.

Although future payments aren’t guaranteed, it gives me some comfort in its management’s dividend policy.

When looking for the best passive income, I’d say it’s important to find affordable dividends. One metric that I look at is a share’s dividend cover. This measures how much a companies’ dividend is covered by its earnings.

SSE has dividend cover of 1.4 times. As it’s comfortably above one, I’m confident that it’ll be able to afford its payments.

What I like about SSE is that it has a fully-funded investment plan over several years, and reasonably clear visibility of its earnings. It also aligns with long-term UK climate and energy security goals.

There’s always a risk that windfall taxes are applied by Governments, which could impact earnings slightly.

Overall, if I had £5,000 to invest right now I’d split it across both of these shares to aim for lifelong passive income.

Should you buy BAE Systems now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

More on Investing Articles

Investing Articles

2 UK shares I’m buying in April

The FTSE 100 and the FTSE 250 have started the year brightly. But could the best opportunities right now still…

Read more »

Investing Articles

Down 72%! This FTSE 250 firm could now be a stock market takeover target

After losing almost three-quarters of its stock market value, this struggling fashion brand could be in the crosshairs of a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is it worth me buying more shares in this FTSE heavyweight after its big Capital Markets Day target updates?

This FTSE firm announced updates to its key strategic targets at its recent Capital Markets day, so is it worth…

Read more »

Investing Articles

I asked ChatGPT for the best FTSE 100 stock to buy in April. It picked a dividend gem!

OpenAI's chatbot reckons this FTSE 100 dividend share with a colossal 8.7% yield is the index's standout stock to consider…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Down 33%! Is this S&P 500 growth stock worth considering?

Palantir shares have fallen by 33% since mid-February. Is this a chance to buy shares of the S&P 500 growth…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

The Diageo share price has fallen so far the stock now offers a 4% dividend yield

Over the last three years, the Diageo share price has fallen around 50%. This drop has pushed the yield up…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

GSK’s share price looks a steal to me anywhere below £43.29, and here’s why

GSK’s share price has fallen a long way from its one-year high, which has only increased the major undervaluation I'd…

Read more »

Investing Articles

6.5% yield! Is this FTSE 100 stock my ticket to a growing second income?

REITs were literally designed to help ordinary investors earn a second income from real estate. And one in particular has…

Read more »