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As great as it is, investors know that passive income can never be guaranteed. That’s especially true if a company goes through a sticky patch of trading. But this is exactly why I think it makes sense to only consider backing companies that have solid track records of returning cash to their loyal shareholders every (or nearly every) year.
Passive income powerhouse
FTSE 100 power-provider National Grid (LSE: NG) is something of a ‘no brainer’ example thanks to its long history of paying dividends to those willing to take on the risk of holding individual company stocks. Importantly, this company has also got great form when it comes to increasing the amount of money it distributes.
Now, I said ‘great’. I didn’t say ‘perfect’. Investors are currently braced for a rare cut in FY25. This follows the Grid’s announcement that it would be raising £7bn to speed its transition to renewable energy sources.
As painful as this might be, the forecast dividend yield still stands at 4.9%. That’s significantly more than a FTSE 100 tracker fund. It looks set to be comfortably covered by expected profit too.
As a utility, National Grid also strikes me as a relatively safe option if (and that’s a big ‘if’) the UK economy runs into trouble in 2025. We all need access to electricity, after all.
By owning its shares, investors will be getting paid for this dependence.
Defensive dividends
Another top-tier titan that’s offered a compelling mix of reliability and growth when it comes to dividends is defence firm BAE Systems (LSE: BA). We’re talking year-after-year increases stretching back decades.
Frankly, I’d be staggered if this didn’t continue. Geo-political concerns have only grown as the Ukraine-Russia conflict has dragged on, pushing nations to increase spending budgets to protect themselves. Seen purely from an investment perspective, that’s great news for the sector and BAE has been busy signing contracts left, right, and centre.
So, what’s the snag? Well, the forecast yield for 2025 stands at a pretty average 3%. Interestingly, the stock is also down 13% in the last month. I suspect some of the latter may be due to management sticking to previous guidance on earnings growth in its last trading statement.
As a more-reliable-than-most source of passive income to hold ‘forever’, however, I think this takes some beating.
Monster yield
For even more income diversification, investors should ponder buying financial services provider Legal & General (LSE: LGEN). This offers the largest forecast yield of the three stocks mentioned here: a monster 9.4%. With equal positions, this would give us a very nice average yield of 5.8% across all three stocks!
Of course, there’s no such thing as a free lunch. A key risk here is that Legal and General is more exposed to macro-economic concerns than the other two. For proof of this, it was forced to take a knife to its dividend stream during the great financial crisis.
On a positive note, we’ve had consistent growth to the dividend in the 15 years since. And I just can’t see management wanting to disrupt this trend, especially if the UK economy has a healthy 2025.
In addition to this, there should be more demand for the stock as interest rates fall and cash savings become less attractive.