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How I’d invest £3,000 for the safest passive income

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper

For the best passive income shares, I’d look to the FTSE 100. It includes many dividend paying stocks.

There’s currently much uncertainty in the world today, and that’s why I’m looking to focus on the safest options for my Stocks and Shares ISA.

Reliable passive income

But what makes a safe and reliable passive income share? I’d say it’s one that provides a steady stream of regular payments.

Bear in mind that no dividend is 100% guaranteed. Companies can decide to suspend or cut payments if their earnings are at risk or if market conditions create much uncertainty.

That said, there are some shares that have a multi-decade record in paying consistent dividends. That includes during several recessions.

I’d look to build a shortlist of shares that have been distributing dividends to shareholders for at least 25 years. Those that have managed to grow dividends over time are particularly appealing.

Other points to consider

Dividends are typically paid from earnings. So I’d want to ensure my companies can afford to pay these regular payments.

One way to assess the affordability of a company’s dividend is to look at its dividend cover. A figure less than one indicates that a company’s earnings don’t sufficiently cover its anticipated dividend.

I prefer to have a buffer, so I’d look for a dividend cover that is greater than 1.2. But the greater the better, in my opinion.

Next, I’d look at dividend yields. The average FTSE 100 yield is around 4%. But the greatest is a market-leading 18%. Bear in mind that high dividend yields aren’t always the most sustainable. They’re sometimes artificially high due to a depressed share price.

And as I’m looking for the safest yields, I’d consider a dividend yield of between 3% and 9%.

Which dividend shares?

Right now there are many shares that match my criteria. But if I’m investing £3,000, I’d split it equally between seven top picks.

Currently, I’d buy BAE Systems, Barclays, BP, GSK, Legal and General, SSE, and British American Tobacco.

On average, this group offers a 5.3% yield, a 30-year dividend history, and a dividend cover of 2.8.

That sounds appealing to me.

Multiple baskets

Another reason for this selection is diversification. Each company operates in a different industry. As I’m looking for safety, that spreads my risk and avoids putting all my eggs in one basket.

One thing to consider is that these seven shares are unlikely to provide market-leading returns over the coming decades, in my opinion. The technology-focused Nasdaq could provide a greater overall return due to its many growth shares.

But large returns can come with the cost of greater swings and more volatility.

That said, today I’m looking for relatively safe passive income in shares that are likely to still have stable businesses in years to come. And with that objective, I’d add all seven shares to my Stocks and Shares ISA today.

The post How I’d invest £3,000 for the safest passive income appeared first on The Motley Fool UK.

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Harshil Patel has positions in BP and British American Tobacco. The Motley Fool UK has recommended Barclays, British American Tobacco, and GSK plc. 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