Some people think that buying shares to generate dividend income requires large sums of money. But in fact it is something I would consider doing even if I only had a few hundred pounds of spare cash. With £500, here are two passive income opportunities I would use.
M&G
Fund management company M&G (LSE: MNG) has rather a boring business model. Clients give it money that it invests on their behalf. If it does well, they may keep their money with M&G for years. But if the firm’s investment managers do not produce good returns, clients could decide to put their funds to work with another company.
When it comes to passive income ideas, a boring company suits me just fine. The business model has been proven over a long time, customer demand for investment management is likely to remain strong and the company can apply its long experience in delivering services. On top of that, the M&G name is well-recognised. That could help it attract and retain clients without needing to splash out on very expensive advertising campaigns.
M&G shares as passive income opportunities
The business profits help to support the M&G dividend. At the moment, the shares offer me a yield of 8.2%. This means that if I put £250 into these shares today, I would hope to earn a little over £20 in dividends next year. If I keep holding the shares, I would hopefully receive the same or greater in each of the following years too.
That is because the company has said it plans to maintain or increase its dividend each year. That is never guaranteed. But I think it is a useful target for company management. Meanwhile I am happy to hold M&G in my portfolio.
Unilever
The second company I would consider investing in for my income portfolio is consumer goods manufacturer Unilever (LSE: ULVR).
The dividend yield on offer is markedly lower than at M&G, coming in at 4.3%. So, why would I go for this company?
In general, diversification helps me lower the risks in my portfolio. Buying shares in a different industry from M&G reduces the risk to me if there is a sudden change in profitability for M&G, or indeed financial services companies altogether. As to why I like Unilever specifically, I think its portfolio of brands could help support its profits. That could lead to the company increasing the dividend for years to come.
Large cash flows
Even when times are tough economically, many customers may decide there is no direct substitute for Marmite or Dove. That helps the company to maintain profit margins. For example, a risk at the moment is ingredient cost inflation eating into profit margins. But customer loyalty to its brands can give Unilever the opportunity to pass on such cost rises to customers in the form of higher retail prices.
That simple-but-effective business model helps keep Unilever profitable. Currently the shares pay a dividend every three months. If I invested £250 at the current Unilever share price, I would hope for dividends of nearly £11 next year.