I like buying shares to set up passive income streams. Once I own them, they really are passive. I can just the let companies do their hard work and hopefully pay me dividends with the profits they make. That is never guaranteed, though, which is why I diversify my passive income streams across several companies.
Here are a couple of firms I would consider adding to my portfolio in March for the potential long-term passive income streams they offer.
Direct Line
Insurers are often strong dividend payers. That can make them attractive from a passive income perspective. The business model lends itself to consistently generating surplus cash flow. That can be paid out to shareholders. Indeed, some insurers aim to pay out regular dividends but also, if their cash surplus reaches a certain point, to pay out a special dividend.
From a passive income perspective, I would consider adding Direct Line (LSE: DLG) to my portfolio this March. With the company due to announce its preliminary results on 8 March, it will be coming under more scrutiny than normal in the City. At the interim stage, the company raised its dividend by 3%. Although that is a modest increase, over the long term, regular increases could help increase my passive income streams significantly. Currently, Direct Line offers a yield of 7.5%. I find that very attractive as a potential addition to my dividend portfolio.
As well as being in an attractive business sector generally, I think Direct Line’s long investment in its iconic red telephone logo gives it a marketing advantage over rivals. That could help sustain customer loyalty and profits. One risk to profits the company flagged earlier this year was the increasing cost of second-hand vehicles. I will be keeping an eye on the preliminary results to see whether the company is managing such risks in a way that still enables it to raise the annual dividend.
DCC
Another company I would buy for its passive income potential is the domestic gas and technology conglomerate DCC (LSE: DCC).
With its yield of 2.9%, the company would offer me an attractive but not unusually large passive income stream. But with an eye on the years to come, I think putting DCC in my portfolio now could turn out to be more and more lucrative over time.
Passive income potential
DCC operates in diverse areas. That helps protect it from some of the risks to individual parts of its business. Still, they do exist and if there is a shift away from using gas as an energy source, which could hurt both profits and revenues.
One thing that impresses me is the company’s proven ability to manage its businesses efficiently and generate substantial profits. It has used its successful business model to increase its dividend for 27 years in a row. At the interim stage, the payout grew more than twice as fast as Direct Line’s, by 7.5%. Dividends are never guaranteed at any company. But I do think the potential for continued dividend growth at DCC could make it a rewarding addition to my portfolio.
Christopher Ruane has no position in any of the shares mentioned. 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.
