Building a passive income portfolio isn’t only about snagging the biggest dividend yields we can find. No, I think it’s important to build in some well-balanced diversification. And not all income has to come from dividends anyway.
Here are five stock market investments I rate as top long-term passive income buys. I’d happily split £5,000 among them right now.
#1: Aviva
The Aviva dividend has been erratic in recent years, but the 2021 payment yielded 5.4% and was well covered by earnings. Analysts are forecasting rises for the next two years too.
I’m looking at a leaner and more efficient company these days. Aviva was seen as bloated for years, but I think it’s come through its restructuring well. And I remain convinced that a conservatively-managed company in the insurance sector can make a very good long-term investment.
The current economic outlook presents the biggest risk, to all financials stocks. But I’m holding for the long term.
#2: Unilever
I own Unilever for dependability. The yield stands at around 4%, which isn’t bad, but not up with the 10%-plus that some FTSE 100 shares are offering.
The Unilever dividend has dipped occasionally. But over 20 years or so, it’s been strongly progressive, which I value more than a one-off big yield.
Unilever is up against a toughening retail environment, so there’s a chance of a couple of years of weaker dividends. But with Unilever’s range of consumer essentials, I see long-term resilience.
#3: Berkshire Hathaway
Berkshire Hathaway has never paid a dividend. It’s run by ace investor Warren Buffett, who certainly knows about cash flow, income, and good value.
Since he took charge in 1965, Berkshire has generate an average total annual return of 20% per year. While I’m building up a long-term income portfolio, I reinvest my dividends every year anyway. So why not let Buffett do it for me?
It just might take slightly more effort to eventually draw down passive income, by selling a few shares at regular intervals.
#4: A housebuilder
I would always keep a UK housebuilder in my passive income portfolio. I currently hold Persimmon, but I also like Taylor Wimpey, and most of the sector.
Dividends can be erratic occasionally, with profits closely tied to the property market. But somewhere to live is a key human essential, and there will always be demand.
When housebuilder shares fall, as they inevitably will some years, I reckon that’s time to top up, and lock in some bigger, effective long-term dividend yields.
#5: An investment trust
I own City of London Investment Trust, but other income trusts that have raised their dividends for the past 20 years also look good. City of London has managed it for 55 years. Murray Income isn’t far behind, at 48 years. And Merchants Trust is there on 40 years.
Investment Trusts have one key advantage for me. They can retain earnings in better years to maintain their dividends during leaner times. That makes them great for drawing down regular income. As I get closer to retirement, I expect to transfer more of my funds to investment trusts.