With inflation rising, passive income has probably never been more crucial. My preferred method is the dividend payout stream, so I invest in several FTSE100 companies.
Here I want to highlight a few of them. Why do I have them? And is it still worth considering buying them today?
The highest profitability of blue chips
First we have Legal and general (LSE:LGEN). It is an insurance and asset management company whose roots go back almost 200 years.
As you know, L&G achieves a dividend yield of 8.1%, which is the highest in the entire FTSE 100 index. This means that £20,000 invested in shares can generate £1,620 of passive income. Pretty.
Just to be clear, I don’t have twenty thousand with my insurer. But it will pay most of its annual dividend on Thursday (June 4) and I have enough shares to give me a few hundred pounds.
But will I continue to hold L&G? My main concern is that profitability may not be sustainable in the medium term.
For example, I read how analysts at Jefferies recently changed to a bearish stance, noting that L&G’s net surplus production – which they consider an indicator of free cash flow – is expected to remain steady at around £1.2 billion through 2028.
If so, this means the payout will still be covered. This could mean a dividend cut in the future to improve capital flexibility – a move that would likely shock many investors who have been milking this reliable cash cow for a long time.
But there’s a reason why yields are so high and the share price has basically gone down for a decade. Dividend stocks are clearly perceived as riskier by the market, so investors should keep this in mind.
What will I do? Well, this juicy yield has kept me committed so far, and there’s an interim (smaller) dividend scheduled for September. I’m looking forward to this before making a decision.
UK property
The second FTSE 100 company is London property (LSE:LMP). Now it’s a newer purchase for me because I took advantage of the gigantic drop in the share price (down 33% in less than four years).
LondonMetric is a real estate investment trust (REIT), which means it is required by law to pay out at least 90% of its taxable income as dividends to shareholders. This is a way to invest in real estate without having to be the owner.
Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice.
Nearly 53% of the £7.6 billion portfolio is allocated to city logistics (e.g. distribution centers for online shopping), where tenants include: AmazonPrimark i Next. E-commerce is booming, but available land is sparse, which creates an attractive active.
Meanwhile, rentals from the leisure and entertainment sector, accounting for 20.2%, come from companies such as Travelodge and Merlin (owner of Alton Towers and Thorpe Park). Contractual increases apply to 98% of rents.
The reason stocks have lost a third of their value is the higher interest rate environment. This, of course, made borrowing more high-priced. If rates remain high due to high inflation, then the REIT will likely underperform.
However, in my opinion the 6.6% dividend yield on offer makes it a risk worth taking. The combination of high yield and return potential makes LondonMetric worth considering at 190p.
Is it worth investing £5,000 in LondonMetric Property Plc now?
If investing expert Mark Rogers and his team have stock advice, it can pay to listen. After all, Twelfth Magpie’s flagship Share Advisor newsletter, which it has run for almost a decade, provides thousands of paying members with the best share recommendations from across the UK and US markets.
Mark believes there are 6 standout stocks that investors should consider buying right now. Want to check if LondonMetric Property Plc is on the list?
Ben McPoland owns shares in Legal & General and Londonmetric Property.
