3 dirt cheap shares I own for passive income

I’m a big believer in passive income – income I make without working. Out of dozens of types, my favorite is the free cash I get from stock dividends.

Three big problems with dividends

However, I have three main problems with stock dividends. The first is that most UK-listed companies do not pay cash dividends. This is especially the case with small companies, which invest cash flow to drive future growth. I get around this problem by dividend-hunting FTSE 100. In this large business index, all but a few blue-chip companies pay regular dividends.

The second problem is that future dividends are not guaranteed, so they can be cut or canceled at any time. For example, during the 2020 Covid-19 crisis, many UK companies reduced or canceled cash payments without notice.

Third, even the largest companies sometimes drop dividends during lean years. But my 36 years of investing show that dividends can be half of the long-term returns of stocks. So I’m committed to sticking with my strategy of being a value/dividend/income investor, whatever.

Income sharing is cheap

I create a more reliable dividend income stream through diversification. With a diversified stock portfolio, I spread my money across multiple baskets by owning, say, 20+ different stocks. It also adds balance and ballast to your portfolio during periodic market meltdowns.

By investing in a variety of quality companies at reasonable prices, my husband and I have built enough passive income to retire today. But while we both enjoy our jobs, we continue to work.

Even so, we are always looking for new stocks to add extra dividend income to our family portfolio. Here are three cheap stocks that bought last summer for tasty dividends:

In this table packed with numbers, my main figure is the line that shows the dividend yield of each company. This is the cash yield paid per share for a year. This includes 5.6% per year in broadcasters ITV to a tasty 9.2% year in insurance and asset managers Legal & General Group.

The second important figure for me is the dividend cover. It shows how many times a company’s dividend is covered by its earnings per share – the higher, the better. In my desk, the dividend cover varies from 1.4 times in L&G to a stronger 2.3 times in ITV.

For the record, I would be happy to buy more shares of these three companies at current price levels. But with dark clouds gathering over the UK economy, I see a recession in 2023-24. This can reduce the company’s earnings in the short term. So, rather than buy more than three of these stocks now, I’ll be hunting for more deals elsewhere in the FTSE 100!