In my experience, the stock market has proved to be one of the best ways to generate a reliable passive income through high-yield dividend stocks. Finding such lucrative investments comes with risk though. Sometimes a high yield can be an indicator of trouble ahead or a newly struggling business. After all, sustaining a 7% dividend yield is quite a challenge. And yet there are two stocks on my watch list that look like they can not only maintain this level but grow it even further. Let’s take a look.
Cigarettes keep delivering dividends
While the morality of investing in a cigarette company can be debated, the high-yield dividends can’t be denied. Despite numerous efforts by governments to discourage smoking, the level of consumption has never been higher. Needless to say, it’s an addictive product that no amount of unpleasant images on the packaging or tax hikes can mitigate. This is obviously fantastic news for British American Tobacco (LSE:BATS).
The company is one of the world’s largest producers of tobacco-based products. And thanks to its immense level of pricing power, the firm boasts an exceptional 38% underlying profit margin. As a result, the management team has continually rewarded shareholders with a reliable and steadily increasing dividend (even at the height of the pandemic). Based on today’s share price, the dividend stock offers a high 7.6% yield. And so, this is a dividend stock I would consider adding to my income portfolio.
But like all businesses, British American Tobacco has some threats to contend with. The rising number of young smokers is starting to add even more regulatory pressure, which may result in further nicotine restrictions. Given this is the substance that makes cigarettes so appealing, such legislation could have a notable impact on the company’s gross revenue and, in turn, its dividends.
A high-yield dividend stock building houses
It’s no secret that due to rapid population growth, the UK is short on housing. Over the last couple of years, home builders like Persimmon (LSE:PSN) have been ramping up their construction efforts to keep up with demand. But collectively, the sector has been failing to do so.
So, in an effort to help expand construction capacity, the UK government has introduced several schemes to make housing more affordable for first-time buyers. This, in turn, allows Persimmon to sell its homes faster, raising capital more quickly that can be used to build more houses. And it seems to be working. The firm’s order book continued to grow even during the pandemic, while the average selling price for homes is climbing. So, I’m not surprised to see the dividend stock paying a high yield of 7.8%.
As impressive as this is, there’s a potential problem on the horizon. The government’s Help-To-Buy scheme will be coming to an end in March 2023. Once it finishes, the affordability of houses, whose prices are currently on the rise, may begin to suffer significantly. Consequently, home sales may begin to fall, potentially jeopardising this dividend for investors. But the high yield may be worth the risk. And so, I am still considering adding this business to my income portfolio as well.
But these aren’t the only high yield dividend stocks I’ve got my eye on…
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. 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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