4 types of stocks I'd buy into for long-term passive income

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There is no lack of high-quality FTSE 100 stocks to buy right now that also offer me above average dividend yields. In fact, I can also identify stocks whose dividends could improve this year, perhaps taking their dividend yields above the average levels in 2022.

What to consider when selecting passive income stocks

At the same time, I need to be careful when investing for the long term. Just because a stock offers a high yield today, does not mean that it will continue to do so in the future. And the opposite is true as well. Just because a stock has low dividend yield today, it does not mean that it cannot add significantly to my pile of passive earnings over time. To me, this says that I should look at a blend of stocks for my passive income portfolio that would ensure steady and solid dividends for me over time.

High-yield defensive stocks

I have identified four categories of stocks to help me achieve my goals. The first group is the defensives with high dividend yields. Examples of these would include utilities. All the FTSE 100 utilities today have yields higher than the average index yield of 3.4%. Considering the predictability of demand for their services, even if the pandemic were to return, they should still be steady performers, as we saw during the pandemic. I have bought SSE among these, though the others are on my investing radar too.

Low-yield, fast-growth defensives

The next group is defensives with low current dividend yields, such as healthcare stocks. Even if their yields are low, they could possibly offer me stronger dividend yields over time if they are fast-growing companies. One such is AstraZeneca, which I invested in for capital growth, but I have found that its dividends are not too bad either. It is possible that a stock like this could take a bit of a dent post-pandemic, but it was a high-performing stock even before Covid-19 came along.

Low-yield, fast-growth cyclicals

This holds not just for defensives but also cyclical stocks with low dividend yields, which brings me to the third kind of stocks. Some stocks’ prices have risen so fast in the past decade that even with big growth in dividends, their yields have remained muted. One such is Ashtead, the industrial equipment rental company. Today it offers the highest dividend yield among FTSE 100 stocks, but only if I had bought it 10 years ago! The trouble with cyclicals, of course is that they could be impacted during slowdowns, though this one company has managed to stay pretty strong over time.

High-yield cyclicals

The last kind of stock I like for my passive income portfolio is high-yield cyclical stocks. This one is a no-brainer, I feel. Some of the stocks with the biggest dividend yields today are miners like Evraz, which saw a mini-boom recently. They have eye-popping yields that I would not want to miss out on, even if they are relatively short-lived. I could reallocate my investments of course, if they stop paying dividends as could happen during downturns, but for now, they look good to me.

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Manika Premsingh owns AstraZeneca, Evraz and SSE. 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.

Motley Fool UK 2022