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 Imperial Brands right now?
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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.
