I think buying UK shares can be a great way to generate a passive income. With that in mind, here are five I’d buy right now with attractive income credentials.
Passive income opportunity
While buying dividend shares can be an excellent way to generate a passive income, dividends are never guaranteed. As dividends are paid out of profits, it may have to reduce the payout if a company’s probability slumps. There are plenty of other reasons why a business may have to reduce its dividend as well.
As such, investing in dividend shares may not be suitable for all investors who want to generate a passive income. However, I’m comfortable with the risks involved. That’s why I’d buy the companies outlined below for my portfolio of UK shares.
UK shares to buy
Three companies I’d acquire, with dividend yields ranging from 3% to 3.3%, are Schroders, S&U and 3i Infrastructure.
All of these businesses have different strengths, weaknesses, opportunities and threats. That’s really why I like them. They’re all so different that if one company starts to struggle, the others should pick up the slack, although that’s not guaranteed.
Schroders is one of the country’s largest and most respected asset managers. S&U provides asset finance, and 3i operates infrastructure investments around the world.
As passive income investments, 3i is attractive as infrastructure assets tend to produce a steady income stream. S&U has a long track record of sensible underwriting of loans, which generates continued profit growth and a strong balance sheet. Meanwhile, Schroders trades on its reputation and investment performance.
Of course, these UK shares all face unique risks as well. 3i’s income could plunge if governments decide to nationalise the company’s assets. A string of underperformance could hurt Schroders’ reputation and reduce investment flows. And S&U may suffer in a significant economic depression, which would cause a high level of loan losses.
Despite these risks, I’d buy all of these UK shares for my portfolio of passive income investments right now.
Income and growth
Two other UK shares I’d buy for my passive income portfolio are Smurfit Kappa Group and Telecom Plus.
Smurfit is one of the UK’s most significant paper and packaging producers. I think this business should benefit from the booming e-commerce market over the next few years.
The stock currently supports a dividend yield of 4.5% and reported earnings growth of 13% last year. However, the main risk to the dividend is rising commodity prices, which could impact profit margins and reduce group income.
Shares in utility provider Telecom Plus currently offer a dividend yield of 4.5%. Utilities tend to be reasonably defensive businesses because households will always need electricity, gas and phone connections.
For example, the number of customers increased 0.8% for the financial year ending 31 March, despite the pandemic.
Unfortunately, a reduction in the Ofgem price cap and higher regulatory costs overall hit profits. Pre-tax profit declined to £60.8m from £56m, due to these costs. This regulatory threat is the most considerable risk to group profits and further enforced price caps could hurt the company’s ability to pay a dividend.
