Much of my passive income in 2023 is likely to come from one major source, dividend shares. That’s because dividends can be both regular and reliable, if chosen wisely.
These quarterly payments are a share of company profits. Some businesses decide to reinvest their profits to try to grow their ventures. But some will distribute cash to shareholders, in the form of dividends.
And this latter group is where my focus will be.
The FTSE 100 is an excellent source for passive income shares, in my opinion. That’s due to its relatively large proportion of dividend shares. On average, it pays a dividend yield of 3.7%. This might not sound like much, but I’d note that many of its shares offer yields above 6%.
Finding the best passive income
When I’m looking for the best passive income shares, the first thing I look for is the yield. The largest figure might look the most appealing. But a few words of warning. I steer clear of double-digit yields. That’s because they’re often not the most sustainable.
For instance, a 15% yield might look very rewarding. But there are risks that the dividend could be cut in the near future, or a share price could be temporarily suppressed.
My preferred sweet spot for dividend yield is around 6% to 10%. And that’s where I’ll start my search.
Consistency is key
Next, I’ll look for stocks that have a shareholder-friendly dividend policy. This could be a specific effort by management teams to consistently distribute payouts. To measure this feature, I’ll look for a long-standing dividend history.
Some Footsie companies have consistently made cash payments for several decades. This level of commitment is what I look for when searching for the best dividend shares.
Lastly, I want to ensure the payments are affordable. Instead of a company having to stretch its financial resources in order to pay the dividend, I’d rather it could comfortably pay out from its current earnings.
Which dividend shares?
When I have spare cash to invest for passive income in 2023, I’ll buy a small selection of the best dividend shares.
In addition to looking at the criteria above, I’ll want to ensure all five are from differing industries. That should provide diversification benefits and would avoid putting all my eggs in one basket.
Right now, I’d buy Phoenix Group, Taylor Wimpey, Legal & General, Rio Tinto, and British American Tobacco.
These shares offer a chunky dividend yield of 8%, an impressive 19-year dividend history, and a comfortable dividend cover of 1.8. In addition, all five picks are excellent businesses that should withstand the test of time.
As an illustration, let’s say I invested £10,000 in these shares at the start of 2023. By the end of the year, I’d expect to have earned £800 in passive income. In addition, as I’m owning a share of a business, I’d also hope its value would grow over time.
Harshil Patel has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. 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 2023