One of my favourite ways to earn passive income is buying dividend shares. By carefully selecting a few of the best ones, I aim to maximise my dividends and grow my investment over time.
The average FTSE 100 dividend yield is currently 3.7%. That’s much better passive income than I’d get from money in the bank. A word of warning, however. Investing in stocks and shares involves more risk than bank savings, so it’s not the fairest comparison.
Now, a 3.7% yield might sound ok, but I prefer to aim higher. There are several UK-based shares that yield 5%-10% and I’m on a mission to find the best ones.
Top passive income pick
This month, I’ve come across several opportunities to buy or add to my portfolio of stocks. The first share I’d buy in March is housebuilder Persimmon (LSE:PSN). It’s a company that I’ve followed for many years and it currently offers a dividend yield of a whopping 10%. Persimmon is a well-managed and established housebuilder that has a history of distributing much of its earnings to shareholders. As I’m targeting passive income, that’s something I like to see. Last year it gave out £750m in dividends and it expects to do the same in 2022.
To maintain its generous dividend yield, it will need to ensure that its earnings keep pace. So it’s encouraging to see that it posted a 23% rise in annual profit and it expects to build 4%-7% more homes in 2022.
That said, as with so many companies right now, costs are rising. But it expects to mitigate higher build costs by increasing selling prices. I reckon it should be able to do so. Housing market activity is robust. In fact, a recent Nationwide report showed that UK house price growth accelerated in February and the average house price now exceeds £260,000. This should bode well for Persimmon.
9% dividend yield
Another passive income pick that I’d consider for March is mining giant Rio Tinto (LSE:RIO). With a current dividend yield of 9%, it’s one of the strongest dividend payers in the FTSE 100. What I like about Rio right now is that it’s a leading stock in a promising sector. It should benefit from rising commodity prices. Iron ore accounts for 66% of its sales, and it’s up by almost 20% this year. The tragic events in Ukraine could extend this trend. Russia is the fifth-largest iron ore producer in the world, and any supply issues could cause prices to rise further.
I also like that Rio is profitable and cash-generative. Some things to bear in mind however. As commodity prices are currently reflecting geopolitical factors, Rio’s share price could be volatile in the short term. Another factor to keep an eye on is that a weaker property sector in China could put a cap on steel prices. Overall though, I’d consider adding it to my portfolio this month.
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Here’s why I’d buy Rio Tinto shares just for the record dividend yield
Harshil Patel owns Persimmon. The Motley Fool UK 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.