Earning a second income can be a great help as the cost of living continues to increase. A second job or a side hustle can be a great source of cash, but there’s only so much time in the day.
That’s why I think buying shares in profitable businesses that distribute their excess cash as dividends can be a great idea. It allows me to earn income that’s genuinely passive – making money while I sleep.
Saving vs investing
Right now, stocks and shares aren’t the only game in town when it comes to passive income. There are savings accounts offering 5.22% interest and three-month UK government bonds come with a 5.26% yield.
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Those numbers offer a decent return – better than the yield on dividend shares in a number of cases. But I think investing in stocks is a better bet for investors with a long-term view.
One reason for this is that I think interest rates are going to be lower than they are now. And this is a view shared by the bond market, with the 10-year government bond returning a 3.8% yield.
If that happens, then returns on cash saving and bonds are going to fall. In other words, investors might get returns above 5% for a few months, but I don’t think this will prove durable.
With dividend stocks though, the reverse is true. Some of the best businesses – including those based in the UK – find ways to increase the amount of dividends they pay to shareholders over time.
Dividend Aristocrats
Dividend Aristocrats are companies that have increased their dividends annually for at least 25 years. This means their shareholder payouts have grown through recessions, wars, Covid-19, and more.
Two examples that stand out to me from the FTSE 100 are drinks company Diageo and consumables distributor Bunzl. Both stocks have dividend yields just above 2%, which doesn’t look that high.
In order to return more than 3.8% a year a decade from now, both companies need to grow at around 7% a year. To me, this looks achievable.
Diageo’s leading brand portfolio should help it grow steadily. There’s a risk that premium pricing could cause consumers to look elsewhere in a recession, but I think the long-term trend is upwards.
Bunzl’s scale allows the distribution company to offer an unmatched service. Its strategy of growing through acquisitions is risky, but the firm has an impressive track record of executing this well.
The fact that a business has increased its dividend before isn’t a guarantee it will continue to do so. But with Diageo and Bunzl, I think there are two businesses that have a durable strategy that just works.
Taking the long-term view
Buying dividend shares and reinvesting the cash they receive can be a great strategy for investors looking to earn a second income. But some of the best companies increase their dividends each year.
These are the stocks I’d look to buy for earning passive income right now. Even with cash and bonds offering some good immediate returns, dividend stocks look to me like the best long-term option.
