I think owning stocks and shares is one of the most straightforward ways of generating a passive income. As such, I’m always on the lookout for dividend stocks to add to my portfolio. Here are three such companies I would buy to generate a passive income.
Income stocks
The first company on my list is water supplier United Utilities (LSE: UU). This firm has become an income champion thanks to its steady revenue stream.
As consumers will always need access to fresh water, I think the business will always generate a steady stream of profits, a percentage of which can be returned to investors.
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At the time of writing, the stock supports a dividend yield of 4.3%. It also has a long track record of increasing its dividend in line with inflation.
That’s why I would buy the company for my portfolio of passive income investments.
However, the company also faces some risks, which could impact its dividend credentials. These include the threat of regulation and higher costs. If Ofwat decides to reduce the amount of profit United Utilities is allowed to earn, the group’s profits could fall. This may force management to reduce the dividend.
Passive income
Another company on my list of income stocks to buy is cigarette producer British American Tobacco (LSE: BATS). At the time of writing, this stock offers a dividend yield of 7.7%.
This market-beating yield reflects the risks facing the business. For example, smoking is a well-known cause of cancer, and governments worldwide are always trying to think of new ways to reduce consumption.
It may only be a matter of time before outright bans are introduced in some of the company’s largest markets. This could have a devastating impact on its profitability. Management would almost certainly cut the dividend in this scenario.
However, we’ve known about the risks of smoking for decades. So far, this has had a limited impact on tobacco consumption. Indeed, a recent report suggests cigarette consumption is at an all-time high.
Therefore, I would buy the company for my portfolio of income stocks, although I’m aware not all investors may be comfortable owning a tobacco producer.
FTSE 100 income champion
The final company I would buy for my portfolio is Legal & General (LSE: LGEN).
I think this passive income champion has similar qualities to United Utilities. The financial giant manages pension and life insurance policies for millions of people.
As such, it has to operate conservatively and not take excessive risks. These products also generate a steady stream of revenues and profits for the group.
I think this stream of profits can support the group’s 6.1% dividend yield. That’s why I would buy the stock today.
That sais, a critical risk facing the business is the possibility of another financial crisis. In the last financial crisis, the company had to slash its dividend as it took heavy losses. Unfortunately, there’s no guarantee the same won’t happen again.
