A great strategy to generate passive income in the new year may be dividend stocks. Our author evaluates his top five choices and his selection criteria.
In 2023, dividend shares are projected to be one important source of a large portion of our passive income. That’s because, if chosen carefully, dividends may be both consistent and dependable.
These periodic payments represent a portion of the company’s profits. Some companies choose to reinvest their revenues in an effort to expand their company. However, some companies will pay out money to shareholders in the form of dividends.
And it is on this latter group that we shall concentrate.
In our opinion, the FTSE 100 is a great place to find shares with passive income. That’s a result of its comparatively high percentage of dividend shares. It has a 3.7% dividend yield on average. This might not seem like much, but it’s important to keep in mind that several of its shares have yields higher than 6%.
Discovering the best passive income
The yield is the first factor we consider when searching for the finest passive income shares. The most attractive figure could be the largest. But first, a word of caution. We avoid yields in double digits. Consequently, they are frequently not the most sustainable.
A 15% yield, for instance, would seem highly lucrative. However, there is a chance that either the dividend or share price could be temporarily lowered in the near future.
Our favorite dividend yield sweet spot is between 6% and 10%. And we’ll begin our quest there.
The key is consistency
After that, we’ll search for stocks with a generous dividend policy. This could be a dedicated initiative by management teams to deliver rewards consistently. We’ll look for a long dividend history to gauge this characteristic.
For many years, certain Footsie companies have only ever paid in cash. When looking for the best dividend stocks, we look for this degree of dedication.
Finally, we want to guarantee that the payments are reasonable. We’d prefer a company to be able to easily pay the dividend out of its present earnings rather than having to strain its financial resources to do so.
What dividend stocks should you buy?
We’ll purchase a small number of the top dividend stocks in 2023 when we have extra money to invest for passive income.
We’ll also want to make sure that all five come from different industries, in addition to the aforementioned criteria. That would prevent us from putting all of our eggs in one basket and should benefit diversification.
These shares have a respectable 19-year dividend history, a substantial 8% annual yield, and a cozy dividend cover of 1.8. Additionally, each of the top five choices is a great company that will stand the test of time.
Let’s use the example of investing £10,000 in these shares at the beginning of 2023. We anticipate making £800 in passive income by year’s end. Additionally, since we own a portion of a company, we would like to see its value increase over time.