2 stocks I’d buy to start generating a passive income

Generating a full year’s salary through passive income is an ambitious goal. But I do think it’s possible over the long term. Historically, passive income has been associated with bonds. But the bond market hasn’t exactly been a stellar performer for a while. That’s not surprising since interest rates have […]

Generating a full year’s salary through passive income is an ambitious goal. But I do think it’s possible over the long term. Historically, passive income has been associated with bonds. But the bond market hasn’t exactly been a stellar performer for a while. That’s not surprising since interest rates have been so low for the past decade or so. Fortunately, the stock market offers an alternative — dividend-paying stocks. 

The question then becomes,  which dividend stocks should I buy? Let’s take a look at two that I’m currently considering for my passive income portfolio.

Transforming from big oil to big eco

When looking for a source of long-term reliable passive dividend income, I like to find businesses that I can still see thriving 10 or even 20 years from now. And a big oil company like BP (LSE:BP) usually wouldn’t be at the top of my list. After all, the world is currently trying to move away from oil and into renewables.

But that’s precisely why BP seems promising. The management team has begun investing heavily in transitioning the company into renewable technologies. In fact, it recently acquired a new pipeline of US solar farms capable of generating 9GW of green electricity. That’s roughly enough to power 2.7m homes.

Its current target is to eliminate 40% of its oil & gas portfolio by 2030, replacing it with renewable energy solutions. The transition undoubtedly comes with risk. A shift on this scale could run into complications. Beyond this, it’s also important to note that renewable technologies are currently not as lucrative as oil. This could result in a cash flow reduction once the transition is complete. As a consequence, the dividend yield could suffer. But with a 4.8% dividend yield today, I think the reward is worth taking the risk.

Passive Income stocks have their risks

Generating passive income with… bricks?

Something that seems to have gone unnoticed by most UK investors, in my opinion, is the country’s brick shortage. After Brexit significantly impacted the European supply line and the pandemic disrupted local production, home builders have been struggling to source this vital material.

The resulting shortage, combined with the continually rising demand from the construction sector, has led to brick prices surging. This is fantastic news for Ibstock (LSE:IBST). The company is a leading UK manufacturer of various building materials, including clay bricks. And it recently announced a £60m investment to further expand its production capacity.

The initial disruptions caused by the pandemic forced the management team to temporarily postpone its last dividend payment to raise cash. It was a prudent move, in my eyes. But thanks to the relatively rapid rollout of the Covid-19 vaccine, lockdown restrictions have eased, and operational disruptions have mostly ceased. As a result, dividends have resumed, and it might not be long before its historical 4% yield returns.

But there are some risks. Ibstock is certainly not the only clay brick manufacturer in the UK expanding its facilities to take advantage of rising prices. Suppose the supply starts to outweigh demand? In that case, I think it’s likely to see brick prices suffer, potentially taking Ibstock and its dividend with it. Needless to say, that could compromise its passive income-generating capabilities. But once again, the reward beats the risks, in my eyes. So I’m still considering this business for my passive income portfolio.

The post 2 stocks I’d buy to start generating a passive income appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Ibstock. 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.

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