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2 UK shares I’ve bought for a passive income

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I believe it’s relatively easy to generate a passive income from UK shares. Indeed, in my portfolio, I’ve a basket of blue-chip equities which I think will meet this goal. 

While there’s no guarantee they’ll continue to produce a passive income from now on, I’m confident in these companies’ outlooks. 

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The best UK shares

Diageo (LSE: DGE) is one of my favourite income investments. This is one of the world’s largest alcoholic beverage companies and owns landmark brands such as Guinness and Smirnoff vodka, which have strong customer followings. 

Unlike other industries, such as mining and construction which can be very cyclical, alcohol sales have increased steadily over the long term, in line with population growth. This has helped the company generate steady sales growth for the past five years. Indeed, revenue has grown at around 2% per annum since 2015. 

This steady growth has helped support Diageo’s dividend and its case as a passive income investment. The organisation has increased its payout at an average annual rate of around 4% over the same period. At the time of writing, the stock supports a dividend yield of 2.5%. 

Diageo has been able to use its size and scale to achieve steady growth rates in the past, which may continue.

However, the business is almost certainly going to face risks. Rising costs could eat into profit margins, and jeopardise the group’s dividend. Other risks, such as a ban on alcohol sales in certain parts of the world, are also a threat to the company. This might seem like a distant threat but it’s happened in the past, so needs to be taken into consideration. 

Passive income investment

One of the other UK shares I own in my income portfolio is British American Tobacco (LSE: BAT).  At the time of writing, shares in this company offer a dividend of around 7%. That is around double the FTSE 100 average.

But investing in the tobacco sector isn’t without risk. Global cigarette consumption is in decline, and authorities worldwide are always looking for new ways to clamp down on smoking due to its detrimental health effects. 

Ultimately, these efforts may mean UK shares such as British American may lose most, if not all, of its customers. That would have a significant impact on group profitability and, of course, its dividend to shareholders. 

However, the war on tobacco isn’t new. For the past 40 years, the risks of smoking have been well-publicised, and cigarette sales have been steadily declining. Despite this headwind, British American has continued to register profit and sales growth.

Since 2015, sales have more than doubled, and profits have increased by around 70%. Over the same period, the company has increased its dividend to investors by around a third. 

For these reasons, I’m happy to include the stock in my passive income portfolio, despite the ethical considerations and risks of owning a tobacco business. British American’s resilience over the past five years suggests to me the company can continue to push through the industry’s challenges.

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Rupert Hargreaves owns shares in Diageo and British American Tobacco. The Motley Fool UK has recommended Diageo. 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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