While the Australian economy is faring a lot better than many expected during the pandemic, I'm still of the belief that rates will remain lower for longer.
Barring a spike in inflation, I suspect the Reserve Bank will keep rates at 0.25% until at least 2022, but possibly longer.
In light of this, I think dividend shares remain the best way to generate a passive income. But which dividend shares should you buy? Three that I rate highly are listed below:
BHP Group Ltd (ASX: BHP)
The first dividend share I would consider buying is BHP. I believe the Big Australian would be a top option for investors due to its world class operations and favourable commodity prices. This is particularly the case with its iron ore operations, which are benefitting greatly from a surge in the price of the steel making ingredient. I expect BHP to generate significant free cash flows in the near term. And with its balance sheet in such a strong position, the majority of this free cash flow is likely to be returned to shareholders. I estimate that the mining giant's shares currently provide investors with a forward fully franked ~5% dividend yield.
VanEck Vectors Australian Banks ETF (ASX: MVB)
Another dividend share to consider is the VanEck Vectors Australian Banks exchange traded fund. I think it is a great option for investors that are looking to invest in the banking sector, but aren't sure which bank to buy. This is because this exchange traded fund gives investors exposure to all of the big four banks. It is also invested in Australia's regional banks and investment bank Macquarie Group Ltd (ASX: MQG). Predicting the dividends the banks will pay in FY 2021 is tricky, but I would expect a yield of at least 5% from this exchange traded fund.
Wesfarmers Ltd (ASX: WES)
A final dividend share to consider buying is Wesfarmers. I'm a big fan of the conglomerate due to its strong businesses and their positive long term outlooks. Combined with its mountain of cash, which is likely to be used for acquisitions in the near future, I believe Wesfarmers is well-placed to grow its earnings and dividends at a solid rate over the next decade. This could make it a great long term option. At present I estimate that its shares offer a fully franked 3.7% FY 2021 dividend yield.
