Passive income is my favourite form of earnings. I get this unearned income without working and even while sleeping. Hence, my family portfolio is heavily skewed towards income shares that pay higher-than-average dividends. Through income investing, I get regular cash dividends, plus capital gains when share prices rise (as they tend to do over decades). My wife recently bought these two new income shares for their market-beating dividends.
Persimmon (LSE: PSN) is a leading UK housebuilder and a member of the blue-chip FTSE 100 index. Along with other housebuilders, the firm made huge profits during the 12-year housing boom that followed the global financial crisis of 2007-09. Notably, the group’s profits were boosted greatly by government Help to Buy subsidies on the sale of new homes.
However, inflation is soaring due to skyrocketing energy prices, plus the Bank of England is hiking interest rates. This has raised fears that the UK housing market may cool down or prices might start to fall. These concerns have hit the share price (currently 1,889p), as seen below:
Having fallen by a quarter in six months, Persimmon shares lie far below their 52-week high of 2,974p. This leaves them on a price-to-earnings ratio below 7.5 and an earnings yield of 13.4%. And these sustained fails have pushed this stock’s dividend yield to a whopping 12.8% a year. My 35 years of investing experience have taught me that double-digit dividend yields rarely persist. Either dividends get cut, or stocks re-rate to higher prices with corresponding lower cash yields.
With fears growing of a coming economic slowdown or full-on recession, I suspect Persimmon’s dividend yield is under threat. That said, even if it were to be halved, it would still be a tidy 6.4% a year. That’s 1.6 times the FTSE 100’s cash yield. So my wife bought this income share to hold for 10+ years, collecting decent dividends while we wait for the share price to hopefully return to former heights.
The second income-generating stock we bought is a familiar household name: giant insurer Aviva (LSE: AV). This firm — a FTSE 100 middleweight — is currently valued at £12.8bn. On Wednesday, Aviva shares leapt by over 12% after it announced plans for a new share buyback. Rising interest rates have boosted the insurer’s solvency ratio — one measure of balance-sheet strength — to 213% of its regulatory minimum. This improvement gives the group more room to return capital to shareholders in the form of higher cash dividends and share buybacks.
In addition, Aviva reported higher sales of general insurance and life assurance products in its first-half results for 2022. And though the cost of some claims is rising at 8% to 12% a year, Aviva has been lifting premiums to offset these increased expenses. At the current share price of 464.9p, this income share is down almost 15% over the past 12 months. This decline has boosted its dividend yield to nearly 7% a year. Having bought Aviva stock at under £4, we’re already sitting on an early paper profit. But we bought this solid stock primarily for its juicy dividends!