Dividend shares can be a useful source of passive income. One thing I like about them is that they do not necessarily require a large initial investment to start generating income for me. If I had £500 to invest in dividend shares today, here are two I would consider buying.
Diversified Energy
The natural gas and oil well operator Diversified Energy (LSE: DEC) is not nearly as well-known as many energy giants. But a pleasant surprise about the company is its double-digit dividend yield. Currently, Diversified pays out a yield of 10.3%.
Its unconventional business model involves buying up wells that have already been operating for decades. Other companies may not think they are still economically viable. But by extending the operating life of such wells, Diversified hopes to keep making money and paying dividends. It pays quarterly, which is another attraction from a passive income perspective.
Such an approach is not without risk. Ultimately, the wells will need to be capped to stop future leaks once production ends. That can be costly. With over 60,000 wells in its portfolio, the expense could hurt profits at Diversified. Meanwhile, the estate of small wells helps Diversified pay an attractive dividend to shareholders. I would consider holding it in my portfolio.
Imperial Brands
Tobacco company Imperial Brands (LSE: IMB) owns a portfolio of products including John Player Special and West. Although declining cigarette consumption threatens revenue and profits, Imperial is trying to combat this risk by building market share in key countries. It is also developing non-cigarette products such as vaping. For now, the economics of that business remain far less attractive than cigarettes. But if that changes as it achieves critical mass, Imperial could be well-positioned to benefit thanks to its established brand portfolio.
After a big dividend cut in 2020, Imperial raised its payout last year, albeit only by 1%. Currently the yield is 7.7%. The shares have increased 20% in price over the past year, suggesting that investors may be attracted to the tobacco sector once more. If the share price keeps rising, the yield will fall. That is why I would consider adding more shares in Imperial to my portfolio today while the yield remains above 7%.
My move on these dividend shares
I would consider buying both of these dividend shares for my portfolio and holding them, waiting for the dividends to pile up. Dividends are never guaranteed, but I would get some diversification by splitting my £250 evenly across the two companies.
That could generate around £45 in passive income per year from my investment of £500. Both companies aim to increase their dividends, so the payout could rise over time, although there is no guarantee of that. But I already think £45 per year is a handsome reward for an investment of £500.