I’m a huge fan of passive income — earnings I collect without work or effort. And my hero, mega-billionaire and philanthropist Warren Buffett, has said: “If you don’t find a way to make money while you sleep, you will work until you die.”
My favourite form of passive income
I know of many ways to collect unearned income. For example, there’s savings interest from cash deposits. Or coupons (interest) from government and corporate bonds. Or rental income from property tenants. State and company pensions also provide passive income. All of these methods have their benefits.
However, I don’t keep large sums on deposit, because I don’t know anyone who got rich by hoarding cash. Likewise, my family portfolio includes no fixed-income bonds and similar securities. Also, I dislike managing both people and property, so don’t have a buy-to-let portfolio.
For me, the best way to generate rising passive income in the long term is by owning dividend-paying shares.
Admittedly, a problem with relying on cash dividends for passive income is that future payouts aren’t guaranteed. Therefore, they can be cut or cancelled at any time.
Another problem is that not all UK-listed stocks pay dividends. In fact, the vast majority don’t. However, all but a handful of FTSE 100 shares pay out cash to their shareholders, making this my happy hunting ground for passive income.
Three delicious dividend stocks
Earlier this week, I reviewed over 120 articles I’d written for The Motley Fool since early November. From this search, I compiled a list of 19 shares for my latest ‘shares to buy’ watchlist.
Among my list of must-own FTSE 100 stocks were these three delightful dividend dynamos:
| Company | Anglo American | Glencore | M&G |
| Sector | Mining | Mining | Financial |
| Share price | 2,447p | 444.1p | 202.9p |
| Market value | £32.6bn | £55.3bn | £4.8bn |
| One-year change | -29.9% | -8.9% | -3.0% |
| Five-year change | +31.0% | +13.4% | -10.6% |
| Dividend yield | 6.7% | 10.2% | 9.7% |
| Dividend cover | 1.8 | 2.3 | N/A* |
Two of these three shares are mega-mining companies, while M&G is an asset manager. Both miners are FTSE 100 heavyweights, while M&G is more of a Footsie minnow.
What draws me to these three stocks is their market-beating dividend yields (in bold). These range from nearly 7% to over 10% a year. But as I wrote earlier, future dividends are not guaranteed, so these may drop in 2023-24.
Across all three shares, the average dividend yield comes to a handsome 8.8% a year. That’s two to three times what I could earn from table-topping savings accounts.
Then again, cash is ultra-safe, while shares are very risky. Indeed, I know from bitter experience that it’s possible to lose 100% of one’s money in a failed business.
I’ll buy these shares soon
I don’t yet own any of these high-yielding shares, but plan to buy all three this summer. I’d do so now, but lack the ready cash.
For the record, I’m expecting 2023 to be a much tougher year for company earnings than 2022 was. Indeed, it wouldn’t surprise me were revenues and profits at all three businesses to fall this year.
That said, I’m a long-term investor with a tried and tested buy-and-hold strategy. Thus, after buying these three stocks, I’ll hold on tight, while collecting powerful passive income for years!
