If I wanted to start generating a passive income, I would consider buying dividend shares. That way, I could benefit from any dividends paid out to owners of the shares. Here are two such shares I am considering buying now for my portfolio. Both of them offer a yield of at least 6%.
Legal & General
If the first thing you think of when you hear the words Legal & General (LSE: LGEN) is a colourful umbrella, then you are one of millions of people who have been exposed to the iconic company logo. That helps it to attract new customers without needing to spend huge sums on building their awareness of the company first.
Legal & General already benefits from a large customer base. I like the fact that it has a sizeable insurance operation. Insurance tends to be quite a lucrative business, as it is basically a numbers game. Once a company understands the likelihood of events happening, it can set premiums at a rate that helps it turn a profit. Sometimes, though, there are surprises. For example, one risk to the firm is the rising value of second-hand cars, which could drive up claim settlement costs. But overall, I think insurance is typically a stable, reliable business. That helps Legal & General fund its dividend.
The company also has a large investment management business. An established reputation and iconic branding help that just like the insurance division. The company has announced plans to increase its dividend annually in coming years. Dividends are never guaranteed, but I find the current 6.6% yield attractive and would consider adding Legal & General to my portfolio.
British American Tobacco
Another industry I think has good economic characteristics is tobacco. The manufacturing costs are low, but premium pricing means the business can be very profitable.
Can that continue? After all, in many developed markets, more cigarette smokers are kicking the habit and fewer new ones take it up. That could hurt revenues, although premium branding may allow tobacco firms to maintain profits for a while by raising prices.
That could help support business at British American Tobacco (LSE: BATS) in the coming years. Further down the road, the company’s heavy investment in non-cigarette tobacco formats could help it. It expects these products to start making a profit in 2025.
Shares to buy now with a 6%+ yield
Meanwhile, British American Tobacco has a 6.8% dividend yield. It has a track record of raising its dividend each year that stretches back more than 20 years.
I think its robust cash flows could help support the dividend in years to come, although they are never guaranteed. British American has announced a big share buyback programme. By reducing the number of shares in circulation, that should boost earnings per share. That could help the firm raise its dividends. Along with Legal & General, it is on my list of shares to buy now for my portfolio.
Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.
Motley Fool UK 2022