A pound sterling on a graph to represent an economic downturn
I believe that investing in stocks and shares is one of the best ways to make a passive income. However, this strategy may not be suitable for all investors.
If a company’s profits suddenly plummet, management may have no choice but to cut its dividend. Unfortunately, this has happened to many companies in the last year.
Still, I’m happy with the risk involved in buying stocks and shares for passive income. And with that in mind, here are two income stocks I would buy today.
Stocks and shares
The first company on my list is a financial services company CMC markets (LSE: CMCX). The group’s profits have skyrocketed over the past year as it benefited from an influx of customers. The number of clients trading CFDs on their platform increased 34% in the fiscal year that ended March 31st. At the same time, the number of stockbrokers increased by 28%.
Total profit increased 127% year over year to £ 224 million. Based on these results, management increased the company’s ordinary dividend for the year by 104% to 30.6p from 15p last year. These numbers suggest that the stock is offering a return of 6.3% at current levels.
Based on these numbers, I would buy CMC for my passive income portfolio of stocks and shares.
However, while the company benefited from a business explosion over the past year, it might not last. Customers may spend less time on CMC’s platforms as the economy reopens and locks eased. This can lead to decreased trading activity and thus profit.
Should earnings decline, CMC could cut dividends next year.
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Passive income
In addition to CMC, I would also buy the oil giant BP (LSE: BP) for my passive income portfolio of stocks and shares. Last year the company announced one of the biggest losses in UK corporate history as falling oil and gas prices hurt its portfolio. This resulted in a 50% cut in the group’s dividend as management pulled out all the stops to save cash.
The story goes on
BP’s net worth has risen dramatically over the past six months. It reported underlying earnings of $ 2.6 billion for the first quarter, up from $ 791 million a year earlier. Additionally, the strong underlying free cash flow and asset sales have reduced net debt by $ 18.1 billion in 12 months.
In my opinion, these numbers suggest that management has stabilized the business, which should prop up the company’s dividend. At the time of writing, the stock supports a dividend yield of 6.2%. So I would buy the stock for my passive income portfolio.
Unfortunately, the company faces some unique risks that other stocks and shares do not. The global shift away from oil and gas to renewable energies is threatening our very existence. Although BP plans to spend more on renewable projects in the next few years, that may not be enough.
As such, the stock may not be suitable for all income investors.
The Post 2 stocks and stocks for residual income first appeared on The Motley Fool UK.
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Rupert Hargreaves has no interest in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. Views about the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make on our subscription services such as Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that taking a variety of insights into account makes us better investors.
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