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Dividend shares are a great way to build a passive income stream. Two picks I reckon investors should be looking at are Burberry (LSE: BRBY) and Bakkavor (LSE: BAKK).
Here’s why!
Fashion
Famous for its distinctive check design, luxury international fashion brand Burberry doesn’t need much more of an introduction, if you ask me.
The shares haven’t had the best time recently, down 45% over a 12-month period. At this time last year they were trading for 2,295p, and they currently trade for 1,254p.
Burberry has been hit by economic volatility amid the slowdown in sales of luxury goods across the globe. Continued volatility for a prolonged period is a real threat to any potential dividends, as they aren’t guaranteed. The business recently announced a profit warning, which isn’t a good sign, although expected, considering the current economic outlook.
However, looking forward to greener pastures, snapping up Burberry shares at current levels could be a shrewd move. They currently trade on a price-to-earnings ratio of 10, which is cheap, in my view, and at a level not seen for some time. Plus, a dividend yield of 5% looks well covered for now.
In addition to this, future forecasts of £4bn in revenues and operating margins of 20% mean the P/E ratio could drop as low as five! However, I’m aware forecasts don’t always come to fruition.
Overall, Burberry is a classic case of a stock with some short-term pain at present, before likely long-term gain, especially when it comes to returns and growth.
Food
Leading provider of freshly prepared ready meals such as salads, frozen pizza, pasta, and more, Bakkavor is a stock I’d love to buy myself when I next can.
Over a 12-month period, the shares are down just 2%, which isn’t too bad, considering how markets have fared in the past year. They’ve dropped from 105p at this time last year, to current levels of 102p currently.
The obvious risks for me are weakened consumer spending across the freshly prepared meals sector. This is linked to tighter budgets, and consumers potentially opting for cheaper alternatives. Plus, higher costs could take a bite out of Bakkavor’s bottom line, which underpin returns.
Conversely, the rate at which the ready-to-eat sector is growing could represent great growth opportunities for Bakkavor. I’m especially buoyed by the firm’s forays and heavy investment into the US and Chinese markets. The latter especially seems to be reaping huge rewards already based on recent trading updates.
Bakkavor’s fundamentals look good to me. The shares look good value for money, trading on a price-to-earnings ratio of 10. An enticing yield of 7.3% would help boost any passive income stream too.
The signs are positive for Bakkavor, if you ask me. Plus, as we lead busier lives than ever, quick, easy meals should only help the firm grow its performance and returns in the future. Furthermore, I reckon the food industry provides an element of defensive ability. After all, we all need to eat.
Similarly to Burberry, Bakkavor has some shorter-term headwinds to navigate, but I’m not overly worried about these. The future looks bright, in my opinion.
