What’s the best way to sort the wheat from the chaff when it comes to choosing passive income dividend stocks? I aim to keep my process as simple as possible, at least to begin with.
Three essential steps
The first thing I look for is the level of the dividend yield. That means chucking anything out that’s not going to give me at least 5%. Income at that level more or less matches what’s available from many bank savings accounts, and that’s a good start.
However, the attraction of stocks over bank accounts is that dividends have the potential to grow over time. When a company increases its dividend, the yield on my purchase price goes up.
So my second step is to search for a strong multi-year dividend record. For that, I’m looking for payment increases every year and no down periods. The strength of underlying operations often shows up in a company’s dividend record. After all, most directors only cut the pay-out because they must – usually if the underlying business is weak.
My third step is to look for a low (P/E) multiple to help make sure the stock is offering value.
This table shows the three top passive income stocks my search uncovered.
Company
Ticker
Recent share price
Market capitalisation
Approximate forward-looking dividend yield
Approximate forward-looking P/E
Redde Northgate
REDD
380p
£852m
6.6%
7
Impact Healthcare REIT
IHR
85p
£349m
8.2%
11
IG Group
IGG
723p
£2,699m
6.5%
7
Redde Northgate (LSE: REDD) provides commercial vehicle solutions for businesses and organisations. It buys vans, trucks and cars to rent out then sells them when they’re past their best.
It’s a steady operation judging by the dividend record. The shareholder payment has increased every year since at least 2018, except during the pandemic in 2020.
Dividend increases ahead
Trading has been good, and in December last year the company issued an upbeat outlook statement.
City analysts expect normalised earnings to ease back by just over 11% in the current trading year to the end of April 2024 and by a further 6% or so next year. However, the dividend looks set to increase a little in both years.
There’s likely to be an element of cyclicality to operations, which adds a bit of risk for shareholders. On top of that, the nature of the business means it carries a chunky debt-load, used to finance the vehicles.
Nevertheless, this stock looks worth consideration as part of a diversified portfolio.
IG Group is a global financial technology company and spread bet platform provider. Meanwhile, Impact Healthcare REIT invests in UK healthcare real estate assets, such as residential and nursing care homes.
Of course, there are risks with both companies. For example, the real estate sector has been feeling the pain recently and is cyclical. But the attractions of the services offered by IG Group can ebb and flow with investors too.
On balance though, I believe all three of these stocks have the potential to make enduring passive income selections. I’d dig in with deeper research right away.
The post 3 of my top passive income dividend stocks to consider buying in April appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
