4 bargain shares I own for powerful passive income

As I’ve written repeatedly over the years, I’m a big fan of passive income. This is the income I earn without any work or effort. For me, that’s as close to ‘free’ cash as I’ll ever get.

I like to come from stock dividends

There are various forms of passive income, including savings interest, bond coupons (also a form of interest), property rental income, stock dividends, company pensions and State Pensions.

But my passive income is almost exclusively from cash dividends paid by shares in listed companies. Here are four stocks that my wife and I bought last year for their strong dividend streams.

Bargain stocks pay high dividends

In the stock market last year, my husband and I bought four of these FTSE 100 Share at what we believe are bargain prices. Each of these stocks offers market-beating cash yields ahead of the blue-chip index at 3.8% annually.

The first thing that showed up on my desk was that all four stocks had fallen over the past 12 months. Meanwhile, the FTSE 100 is up 6.4% over the year. Thus, all these stocks lag the broader index.

When looking for passive income, I look for stocks with high dividend yields. In the table above, this ranges from 6.7% per year in insurance companies Aviva to a tasty 9.3% year in the asset manager Legal & General Group.

The average cash yield on all four stocks is up to 7.8% per year. That’s about twice what I could earn in annual interest from an over-the-table savings account.

However, not all of these cash payments are completely covered by the company’s earnings. The weakest dividend cap is at Vodafone Group, whose payout is only four-fifths covered by trailing earnings.

Now for the bad news

Of course, investing in stocks is risky and investors have the potential to lose up to 100% of their investment. But I think the 7.8% annual cash yield from this four-share mini-portfolio is a decent reward for patient, long-term shareholders.

Also, future stock dividends are not guaranteed, so they can be cut or canceled at any time. Indeed, Vodafone finally cut its dividend in 2018, Rio Tinto did it in 2016, and Aviva did it in 2012, 2013 and 2019. But I mitigate this risk by investing in a variety of income-producing stocks.

Finally, dividend investing for passive income often comes with a bonus kicker. Since we bought these four stocks, the price has increased by 11.9%, despite the decline over 12 months. And a killer combination of dividends and capital gains that gives you the freedom to retire when you want!