I love talking about which stocks to buy to enjoy a passive income. The prospect of earning money without having to lift a finger seems too good to be true. But history shows us that with the right strategy it could be possible to make a fat sack of cash with minimal effort.
Here is how I seek to build robust income streams with UK dividend stocks:
Hunt for chunky dividend yields. I’m unlikely to create the sort of wealth to become financially independent by buying low-paying shares. Sure, I can find companies that grow dividends year after year, but a sub-1% dividend yield is unlikely to make me a decent amount of cash right now.
Look beyond the near term. A big near-term yield isn’t the only thing to consider of course. The best dividend shares to buy are ones that can deliver over a number of years. Take Imperial Brands as an example. Sure, it’s 7.7% yield for this year is huge. But will the business keep paying big rewards as smoking becomes increasingly unfashionable?
Search for stocks with defensive qualities. Companies that are able to generate solid profits during good times and bad can be critical for passive income streams. In the event of an economic downturn, a water supplier can expect earnings to remain more stable than, say, a leisure stock.
Pick cash-generating companies with strong balance sheets. Healthy free cash flows give companies a better chance of paying good dividends. The same can be said for UK shares that don’t have suffocating amounts of debt that need to be repaid.
A stock I bought for a passive income
This list could help me to generate healthy passive income streams. But it’s by no means exhaustive. Still, let me talk you a top dividend stock I bought with these principles in mind. Coca-Cola HBC (LSE: CCH).
There are larger dividend yields out there than the 2.8% dividend yield that Coca-Cola HBC currently boasts. However, this FTSE 100 firm has a solid record of profits growth that has enabled it to raise shareholder payouts year after year. City analysts are expecting 2022’s dividend to rise 9% from last year’s anticipated reward. This is worth its weight in gold for a long-term investor like me.
One of my FTSE 100 favourites
Coca-Cola HBC is able to deliver strong profits, thanks to the immense brand power of its drinks. As well as Coke the business also bottles Sprite, Fanta and Monster Energy, to name a few. They sell in huge volumes even when consumer spending comes under pressure, giving it the confidence and the financial means to keep raising dividends.
I also like Coca-Cola HBC because of its excellent cash flows. This doesn’t just give the business the firepower to keep rewarding its shareholders generously. It also gives the FTSE 100 firm enough financial firepower to grow profits through organic investment and acquisitions.
In recent weeks, fellow soft drinks producer AG Barr warned on the impact of rising ingredient and labour costs on earnings. It’s a threat Coca-Cola HBC will also be forced to weather, though it’s not one that’s frightened me off. I think this dividend heavyweight will be a brilliant passive income stock for me for years to come.
The post A FTSE 100 stock I bought for a passive income! appeared first on The Motley Fool UK.
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3 FTSE 100 shares to buy right now!
Royston Wild owns Coca-Cola HBC. The Motley Fool UK has recommended AG Barr, Coca-Cola HBC, and Imperial Brands. 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.
