When looking for passive income stocks for my portfolio, I like to focus on companies with the most sustainable dividend yields. This does not necessarily mean high yields.
It means I am looking for corporations paying attractive dividends that they can afford without having to take on debt or skimp on reinvesting back into the business.
With that in mind, here are three passive income shares I would buy today, all of which yield more than 7%.
Trading income
The first company is the financial services group Plus500 (LSE: PLUS). This firm generates revenue from traders who place deals on its platforms. By taking a tiny slice off each trade, the enterprise is able to generate significant profits and hefty profit margins. As part of this model, profits tend to rise during periods of market volatility and fall when traders are sitting on their hands.
This means it has the capacity to produce significant dividends for investors. At the time of writing, the stock offers a dividend yield of 7%, although it could vary going forward. Indeed, the company has a track record of returning more cash to investors when profits are rising and less during periods of declining sales.
Some challenges the group may face include competition and regulations. These could hurt its profit margins and lead to reduced shareholder returns.
Passive income diversification
Henderson Far East Income (LSE: HFEL) presents a way for me to build exposure to a diverse portfolio of income investments across Asia.
I think this strategy makes a lot of sense for my portfolio, as it will help me build exposure to different regions of the world and diverse businesses.
At the time of writing, the trust offers investors a dividend yield of 7.9%. This is backed up by income from its top holdings, including Bank of China, Samsung Electronics and Taiwan Semiconductor.
One significant benefit of dividend investing with income trusts is they can manage their payouts. Trusts can hold back a quarter of their income every year to build a revenue reserve. These companies can then use this to cover their dividends to investors if the holdings in the portfolio cut their payouts. As a result, investors are insulated from individual business actions to a certain degree.
A downside of this approach is that funds can charge high management fees. These can eat away at returns in the long run.
Growing business
Jupiter Fund Management (LSE: JUP) is my final passive income buy. Over the past five years, this firm has built a niche in the fund management industry. Thanks to its strong reputation with customers, assets under management recently hit a record high.
As assets under management have expanded, so have management fees. This generates a steady stream of income for the company, which it can then return to investors. At the time of writing, the stock offers a dividend yield of 7%. There is room for growth in the years ahead as assets under management continue to build.
Some risks that could hold back growth include completion from larger peers. A price war in the fund management sector could drive down Jupiter’s profits. An increased regulatory burden may also impact the company’s profit margins.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management. 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.
