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I have identified two dividend stocks I would look to buy for my holdings in 2022 to make me a passive income.
Dividend stock #1
My first pick is M&G (LSE:MNG) with a yield of close to 9%. Bear in mind the FTSE 100 average is 3%-4%. M&G is a UK based asset management firm that splits its business into five different areas.
The financial sector can often be cyclically variable in terms of revenue. This was signified by many traditional financial stocks that succumbed to stagnation or sharp revenue declines in 2020 and 2021. Wealth management tends to enjoy relatively stable revenues due to constant fees for advisory services and asset management charges. Stable revenues help maintain a regular dividend payout and higher than average yield.
As I write, M&G shares are trading for 209p compared to 200p at this time last year, which is a modest 4% return. At current levels, a £5.3bn market cap, and such a juicy dividend yield, I am surprised shares are so cheap.
There are risks associated with M&G as a dividend stock. Firstly, dividends aren’t guaranteed. If investments and funds weren’t paying off, this could affect payouts. Furthermore, M&G is a relatively small player in a big market. This could result in it being out muscled and outmanoeuvred by larger, more established competitors.
My second pick is Aviva (LSE:AV) with a dividend yield of just under 5%. There are dividend stocks out there that offer a much higher yield but I have picked Aviva due to my belief that it is a quality business. It is also taking steps to further enhance operations and reward investors.
Aviva is recognised as the largest insurance firm in the UK with over 15m customers. Insurance is a must for consumers and businesses. Even in times of economic uncertainty, insurance shouldn’t be affected.
As I write, Aviva shares are trading for 436p per share whereas this time last year shares were trading for 351p. This a 24% return over a 12-month period. Based on current events within the business and Aviva’s position in the insurance market, the current share price looks cheap in my opinion.
Three key initiatives by Aviva make it an exciting dividend stock for me. Firstly, it decided to sell non-core businesses and focus on the key territories of the UK, Ireland, and Canada. Most recently it sold its Vietnamese business. Next, the proceeds it nets from these sales will pay down debt as well as re-invest in the core territories mentioned. Finally, Aviva has committed to return £4bn to investors by the end of 2022 through sale of businesses and a share buyback scheme.
Despite my bullish stance towards Aviva as a dividend stock, there are risks too. It’s current transformation looks simple on paper. Sell non-profitable businesses, pay down debt, and repay shareholders. If things don’t go to plan, performance and any dividend payout could be affected.
Overall Aviva looks like a good quality stock to help me make a passive income. It has committed to dividend payouts this year and has a clear plan to streamline operations to benefit performance.
Jabran Khan 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.
Motley Fool UK 2022