Top
Image Alt

The Investing Box

  /  Editor's Pick   /  Here are 2 underrated passive income stocks to buy

Here are 2 underrated passive income stocks to buy

A young black man makes the symbol of a peace sign with two fingers

As well as holding stocks and shares that I actively trade in my portfolio, I also own a number of dividend shares that provide me with a passive income.

Given the market uncertainty at the moment, I think dividend stocks are a great way of diversifying my portfolio. I can use these dividend earnings as a supplementary income or as more money to reinvest in stocks.

Most FTSE 100 companies offer a dividend yield, an amount of money companies pays to shareholders for holding its shares. The average FTSE 100 dividend yield is around 4%, but there are companies in the composite that offer far higher amounts.

Here are the two stocks that I’d buy today if I wanted to increase my levels of passive income.

Persimmon

Persimmon (LSE:PSN) is one of the largest housebuilders in the UK and has a market value of £4.6bn. Currently, the company offers a very attractive dividend yield of 16%. With inflation forecast to reach 11% by October, this is one of the only FTSE 100 stocks that offers double-digit yields and beats consumer price inflation.

Persimmon has already had a hard year and, given the rising threat of a recession, it could struggle even further as the market for buying and selling houses dries up. The company is still dealing with supply chain problems and securing the necessary labour to work on building new developments.

Nonetheless, in the long run Persimmon could recover well, particularly if house prices in the UK continue to rise. The company is also 75% forward sold for this year. Given the drop in the price of shares recently, I think now is a good time to add the company to my portfolio.

Rio Tinto

Another FTSE 100 company that offers a high dividend yield is the world’s second largest mining and metals company, Rio Tinto (LSE:RIO). Its annual dividend yield for 2022 sits at 10.46%, slightly above current inflation levels.

It’s important to note that Rio Tinto’s earnings, and therefore dividend yield, are closely linked to the price of commodities it produces. With over 50% of Rio Tinto’s revenues in 2021 coming from iron ore, the company’s profits may suffer if the price of the commodity was to fall.

Even if the stock does struggle in the short term, the company still pays a dividend yield of over 2.5 times that of the FTSE 100.

In the long run, I feel positive about the stock’s performance. Themes of green technology and increased urbanisation rates are likely to drive demand for commodities. There are also ongoing infrastructure projects in developing economies that require a high level of steel. As well as this, Rio Tinto has committed to producing 2.3 tonnes of lithium – a material found in electric vehicle battery production – which has a rising demand level.

I believe that all of these factors could have a positive effect on Rio Tinto’s share price. This may result in an even higher dividend yield being paid out in the coming years. I will look to buy shares in the company soon.

The post Here are 2 underrated passive income stocks to buy appeared first on The Motley Fool UK.

Should you invest £1,000 in Persimmon right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Persimmon made the list?

See the 6 stocks

setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()

More reading

Yasmin Rufo 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.