It pays to be careful when looking for passive income stocks
Passive income refers to generating revenue from minimal effort. My favourite method is picking up dividends from UK shares. But in some respects, I think the term can be misleading. Thereâs nothing to be gained from being passive when it comes to choosing stocks. The more time spent on up-front research, the more likely the right shares will be picked.
The most common measure used to identify stocks paying the most generous dividends is to look at the yield on offer. And because there are no guarantees when it comes to future payouts, itâs common to only consider amounts paid to shareholders during the previous 12 months. Even so, itâs important to exercise some care.
Buyer beware
For example, a look at the league table of the five highest-yielding FTSE 100 shares shows WPP (LSE:WPP) in first place.
| Stock | Yield (%) |
|---|---|
| WPP | 9.9 |
| Taylor Wimpey | 9.7 |
| Legal & General | 8.9 |
| Phoenix Group | 8.3 |
| M&G | 7.9 |
But in August, the advertising and marketing agency reported its results for the six months ended 30 June. These showed a 7.8% fall in revenue compared to the same period in 2024. More significantly, pre-tax profit fell 71%.
The groupâs chief executive said: âIt has been a challenging first half given pressures on client spending and a slower new business environment.â
As a consequence, the groupâs now expecting full-year revenue less pass-through costs (its preferred performance measure) to be 3-5% lower than last year. The group also announced a 50% cut in its interim dividend. If the final payout was reduced by the same amount, the stock would be yielding 5%. This is still above the FTSE 100 average but nowhere near the 9.9% reported.
And while a return like this is still better than that offered on most savings accounts, I think thereâs too much uncertainty over the state of the global advertising market to make me want to invest. Artificial intelligence (AI) solutions are making it easier for firms to make their own creative content. Also, while WPP retains an impressive blue-chip client base and has a huge global reach, I think there are currently better opportunities elsewhere.
Something else to think about
For example, thereâs one stock listed in the Footsie top five that last cut its dividend in 2009. And if it wasnât for the pandemic â when it kept its payout unchanged for one year — Legal & General (LSE:LGEN) could boast about having increased it every year since. The savings and retirement group has pledged to increase its payout by 2% a year from 2025-2027. Itâs also buying back its own shares.
Although the group faces increased competition from challenger brands — often with a lower-cost base — and it’s vulnerable to uncertainty in global stock and bond markets, it sees great potential from acquiring new pension schemes to manage. It reckons £1trn of these assets are up for grabs across the globe. The group also calculates that the future profit from its insurance business is worth £13.1bn in current (at 30 June) prices.
For its impressive yield and long track record of dividend growth — underpinned by a huge pipeline of future pensions business and a strong balance sheet â I think Legal & General could be a stock to consider.
The post It pays to be careful when looking for passive income stocks appeared first on The Motley Fool UK.
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More reading
- A massive 9.1% yield at a 36.3% discount!? Should investors consider buying this passive income gem?
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- £20k in savings? Hereâs how you could try to turn that into a £13,582 annual passive income
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James Beard has positions in Legal & General Group Plc. 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.
