How I would build passive income through dividend shares in 2022
Passive income is a term thrown around a lot today. Many dream of having that extra cash flow through whilst they sleep. However, not everyone can afford to directly invest in real estate and properties. Luckily, dividend investing can be a very effective strategy for building passive income.
Many investors target dividend shares in order to create a stable and regular payout from their portfolio. With yields averaging 4.1% within the FTSE 100, a £1,000 investment would return an average £41 annually. Now, if I were to put this investment in BHP Group, a stock boasting an 11% figure, annual dividend returns would leap to £110. But income investment isn’t as simple as finding the highest figure.
A company issues dividends based on its free cash flow. This decision is routinely reviewed by management, meaning these returns are never guaranteed. Whilst high payouts may indicate strong financial performance, it may also be an unhealthy distribution of free cash from the company’s management. The strategy certainly has its risks. With this in mind, how am I approaching dividend-focused investing in 2022?
Dividend investing in 2022
The pandemic’s shock to corporate earnings across these last few years has subsequently impacted dividend yields. As disrupted markets have forced companies into rationed operations, payouts have largely withdrawn across the board. However, a few companies have paid consistent dividends throughout the pandemic. These are the stocks I would target to build my passive income portfolio.
First would be British American Tobacco. The manufacturer has consistently kept dividend yields at around 7% since 2018. The company’s increases in adjusted revenue and net cash across FY21 suggests financial resilience will continue throughout the pandemic. I am confident in its delivery of strong dividend figures throughout 2022.
I would also consider National Grid. The company’s dividend rate is noticeably lower at 4.63%. However, boasting undisrupted payouts throughout the pandemic, I have faith in this utilities company to also deliver consistent dividends throughout this year. Indeed, a 27% increase in cash generation seen in the FY21 report suggests a stable direction forward for this company.
The real-estate case
As said before, direct investment in real estate is a very expensive venture. However, investment in the real estate market is still accessible. I would also consider adding a real estate investment trust (REIT) such as Land Securities (LSE: LAND) to my passive income strategy.
This addition would diversify my portfolio by creating exposure to the real estate market. This is particularly important in 2022, as easing lockdown regulations may lead to higher property prices with companies returning to on-site work. Indeed, Land Securities currently holds a dividend of just under 4%. However, the trust’s net rental income margins increased by 25% across FY20-21. This suggests the dividend figure to be in a secure position as the value of the trust increases.
Dividend investment certainly has its risks. However, it can also be very rewarding, particularly with a diverse and considered portfolio. With investments in tobacco, utilities and real estate, I am confident that my passive income portfolio will continue to grow throughout 2022.
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Hamish Cassidy has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Landsec. 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.