Rising inflation, tensions between Ukraine and Russia, and a stubbornly persistent pandemic have combined to put markets in a tizzy right now. Not that I think this should really bother me as I invest for passive income.
Theoretically, holding dividend-bearing stocks should take a lot of worry out of investing. One can simply buy and hold and wait to be paid every three or six months. The money received can help with bills and other living expenses or be reinvested into buying more shares. Naturally, the second course of action is far more Foolish since it allows gains to compound, growing wealth over time.
Top passive income stocks to buy
With this in mind, here are 22 UK stocks I’m interested in to buy and hold for 2022 (and their forecast dividend yields).
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- 888 (4.5%)
- Barclays (4.3%)
- Bloomsbury Publishing (2.8%)
- Britvic (3.1%)
- Burberry (2.5%)
- CMC Markets (4.2%)
- Diageo (2%)
- GlaxoSmithKline (3.3%)
- Hipgnosis Songs Fund (4.5%)
- IG Group (5.5%)
- Lok ‘n Store (1.9%)
- Lloyds Bank (4.9%)
- National Grid (4.7%)
- Persimmon (10.1%)
- Primary Health Properties (4.6%)
- Rio Tinto(8.9%)
- Somero Enterprises (6.7%)
- Target Healthcare (6.1%)
- Taylor Wimpey (8.3%)
- Tritax Big Box (3.1%)
- Tritax Eurobox (4.8%)
- Unilever (3.7%)
Rather than attempt to cover every stock, let’s pick out a few highlights that appeal to me most by sector.
Financials
Due to the complexity of their balance sheets, I’m not really a fan of banking stocks. That said, I see the appeal if I were looking for passive income. Many offer decent yields. Moreover, banks could finally see positive momentum if interest rate hikes become more frequent. As such, I’d include perennial retail investor favourite Lloyds Bank in my 22-strong portfolio. Barclays would also be there as it benefits from having a lucrative investment banking arm, in addition to boasting a 4.3% forecast yield.
Online trading platform providers are far more my cup of tea and act as a potentially useful hedge against market volatility. As a holder of IG Group already, I can’t help but include it here. I’d also be partial to taking a stake in CMC Markets, even though management recently cut the payout. While the industry is often targeted by regulators, these firms stand to benefit when times get tough since they generate more commission from increasingly active clients.
Consumer goods
UK investors are spoilt when it comes to options in the consumer goods sector. In addition to offering decent growth, I also think shares from this part of the market are worth holding for the income they throw off.
Unilever is generating a lot of headlines right now thanks to its recent (and rejected) bid to acquire the consumer healthcare arm of GlaxoSmithKline (which is also on my list). Regardless of what happens next, the Marmite-maker has shown itself to be an excellent source of rising dividends.
Premium drinks owner Diageo was my pick for 2021 and, my goodness, it did well. Like Unilever, it goes in for the simple reason that it’s shown a real commitment to continue hiking dividends over the years.
REITS
In exchange for not paying corporation or capital gains tax, REITS (or real estate investment trusts) are required to pay out 90% of their rental income to investors in the form of dividends. That makes them ideal candidates for a portfolio like this.
I’ll admit to being biased toward firms that specialise in buying/managing portfolios of warehouses and logistics assets since I don’t think there’s much chance of the online shopping trend going into reverse. I’d pick out Tritax Big Box and its Europe-focused equivalent Tritax Eurobox. Dividends at self-storage provider Lok ‘n Store are also growing at a fair clip.
Trusts specialising in owning buildings related to healthcare are another great option. I particularly like Primary Health Properties and care home provider Target Healthcare.
Other
Some of the 22 either don’t fit a particular sector or remain my sole pick from a specific part of the market.
Somero Enterprises would make the list of 22. While its shares could prove to be more volatile thanks to its small-cap status, the company is a leader in supplying equipment to ensure concrete surfaces are flat. Thanks to the US construction boom, it’s been raking in the cash.
No passive income portfolio would be complete without a utility stock. Energy transmission and distribution business National Grid is my preferred choice here. While annual increases aren’t electrifying, the essential nature of what it does should mean that there’s little danger of the company stopping its dividend payments.
While the mining sector is notoriously cyclical, FTSE 100 member Rio Tinto has its fingers in so many commodity pies that the rewards should outweigh the risks. The company also stands to benefit hugely from the clean energy revolution.
BAE Systems seems a rather pertinent choice given what’s happening in eastern Europe right now but it would have made the list regardless. While it hasn’t rocketed in value over the years, the consistency shown by the defence behemoth in raising its bi-annual payouts is second to none.
A few things to consider
Although there’s no perfect number, I believe that 22 stocks should really give me all of the benefits I need from spreading my money around. Fewer than this and I may be taking on too much risk; more and the law of diminishing returns kicks in.
Second, I’ve intentionally avoided picking only the highest-yielding stocks on the market. This might seem odd if the goal is to generate passive income. However, those appearing to offer the largest payouts are often those most likely to cut them (a high yield can be the result of a plunging share price due to poor trading). It’s far better, at least in my opinion, to buy company stocks where dividends are growing rather than standing still. That’s exactly what’s been happening at many of those listed above.
Third, it’s vital to remember that this isn’t the only strategy available to me. Another option is to buy a few actively-managed income-focused funds. As one might expect, this incurs fees that ultimately eat into eventual returns. The beauty of running a portfolio myself is that, aside from the costs of acquiring the stocks and the ongoing platform charge, there’s nothing else to pay.
No crystal ball
Last, it’s important to acknowledge that some of the 22 dividend stocks I’ve picked out won’t do as well as others in 2022. The share prices of a few may soar, others may dip. But I’m aware that all stocks come with risks.
Yet this is missing the point. The objective here is merely to select great dividend stocks. Passive income is the goal here, not capital gains. If I were looking for the latter, very few of the above would probably make it into my portfolio. But that’s a list for another day.
