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When it comes to passive income, I think dividend shares are the way to go. And for those who are able to invest regularly over a long period of time, the rewards can be great.
Over 30 years, a 5% average annual return can turn £10 per week into something that generates £1,727 per year in dividends. And I don’t think 5% is beyond the bounds of what’s realistic.
Taylor Wimpey
Shares in FTSE 100 builder Taylor Wimpey (LSE:TW) come with a dividend yield of around 8.5%. That’s well above the required 5% return and there are more reasons to be positive.
It’s no secret that the UK has a shortage of houses and this isn’t changing any time soon. So there’s likely to be a growing market for the company to take advantage of over the long term.
The biggest risks with this business is margins. Inflation can push up the price of building materials and the company has just reported extra fire safety remediation costs too.
That can be a threat to cash flows and profits. But it’s worth noting that Taylor Wimpey has an approach to its dividend that is different to other housebuilders.
The company bases its dividend on the value of its assets, rather than its cash flows. That means it’s likely to keep distributing cash to shareholders even through a downturn.
Obviously, it can’t do this indefinitely. But investors with a positive view of the UK housing market might think Taylor Wimpey shares offer more stability than other housebuilders.
Admiral
On the face of it, Admiral (LSE:ADM) doesn’t look like an obvious dividend stock for someone aiming for a 5% annual return. But appearances can be deceptive.
In some places, the yield currently shows up as around 3%, but that’s only the base dividend. The FTSE 100 insurer has consistently distributed additional special dividends on top of this.
Admiral’s policy is to distribute 65% of its pre-tax profits as a regular dividend. On top of this, it also pays out any cash it doesn’t need to meet its solvency requirements.
Dividends are never guaranteed – and special ones like this can absolutely fluctuate. But it’s worth noting that this makes the stock a better passive income investment than it might seem.
Obviously, the amount Admiral can return as a special dividend depends on regulatory requirements. And the potential for a change in these is a risk to take seriously with the stock.
Overall, though, the firm’s strategy of reinsuring most of its policies is one that I think could prove highly cash-generative. And this means it’s worth considering for dividend investors.
Passive income
Dividend shares aren’t always what they seem. And in some cases, a closer look can reveal they’re more attractive than they initially appear.
I think this is true of both Taylor Wimpey and Admiral. As a result, I see both as stocks dividend investors should have on their lists of stocks to consider buying.
When it comes to passive income, investing regularly in stocks and reinvesting dividends is the strategy I prefer. Over time, I think this is likely to be far better than leaving cash in the bank.
