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Finding good stocks for passive income can be a challenging task. An investor doesn’t just want to look at a stock with a high dividend yield. Rather, consistency in payments over several years and a track record of increasing income are other key points that need to be considered. Here are two ideas for consideration that I think tick the boxes.
Generous dividend cover
First is Paragon Banking Group (LSE:PAG). The stock is up 24% over the last year, with a dividend yield of 4.26%. It’s a UK-based specialist banking and financial services company that focuses primarily on lending and savings products. Therefore, the main way it generates revenue is through the spread between the interest it earns on loans and mortgages (by charging higher rates to borrowers) and the interest it pays on savings deposits (generally lower rates).
Over the last five years, the dividend per share has grown by an impressive 23.5%. When I see both the dividend increasing and the share price rallying, it’s a strong indication that the company is doing well. Higher profits supported the stock’s upward movement. Due to the increase in earnings, it can afford to increase the money being paid out to shareholders.
Dividend cover is currently 2.4, which bodes well for the future. Any number above 1 shows that the earnings per share completely cover the income being paid out.
One risk is that with a focus on loans, there’s the potential for defaults. If the UK economy really starts to nosedive later this year, the bank could lose money from clients being unable to repay their loans.
Stock and dividend growth
Another option is HSBC (LSE:HSBA). The global banking giant has increased its dividend by 27% over the past five years, yielding 5.27% currently.
Some might be a little concerned, as the dividend was paused during the pandemic. But it was only for a brief period, and was at the request of the financial regulator for all banks. Therefore, I don’t see this as a red flag when considering the bank for income.
Instead, the growth of the dividend has been impressive. The share price has increased by 40% over the last year, making the fact that the yield remains above 5% unusual. Typically, a rising share price acts to lower the dividend yield. Yet, in this case, the increase in the dividend per share has offset this.
I think the bank can continue to pay out good income to investors. HSBC has significant exposure to Asia (particularly Hong Kong and mainland China) where economic momentum is expected to improve as monetary and fiscal stimulus measures support growth. Furthermore, the ongoing cost-cutting initiatives and restructuring efforts are enhancing operational efficiency, which should further boost profits.
Of course, if interest rates get cut in the coming year at a faster pace than expected, this could undermine net interest income. It’s a potential risk to be aware of. Yet, even with this, I think both HSBC and Paragon are passive income options worth investors considering.
