With £4,000 in my pocket and looking for passive income ideas, what would I do? I’d pick some UK income shares with attractive dividends and split the money evenly between them.
£4,000 is enough to diversify. That allows me to reduce my risk if a company performs poorly in future. I’d put £1,000 into each of these four shares today.
High yield shares
An obvious place for me to start would be on the list of highest yielding UK shares. One of the names that consistently pops up is tobacco company Imperial Brands.
With an 8.3% yield, it certainly qualify as an income stock. Tobacco is a highly cash generative business. Its maturity reduces the need to reinvest earnings into future growth opportunities. I think Imperial’s focus on its five key cigarette markets, where it is trying to build on its success, is a good strategic choice to mitigate declining cigarette volumes.
The falling popularity of cigarettes in many markets remains a risk, though. It could hurt the company’s sales and profits. And many people will shun tobacco stocks on ethical grounds.
Dividend shares that doubled
Income shares sometimes turn out to be growth shares too.
Investment management firm M&G is an example. Its shares doubled in a year – but I could still get a yield of 7.7% by adding them to my portfolio today. That would be a prospective payout of £77 annually for my £1,000 investment.
The company’s brand is an asset that I think should help it to grow in future. I also like the fact that the dividend is covered by earnings, even after a rise this year.
But risks include any economic downturn reducing customers’ ability to invest, which would hurt revenues.
Income shares in infrastructure
For income shares, I see attraction in dull-but-important businesses that reliably generate cash.
An example is the infrastructure owner and operator National Grid. The company enjoys several advantages. One is the ongoing need for electricity, which should continue for decades to come. A second is the high entry costs for a competitor to replicate the company’s network. That makes it a natural monopoly, which gives it pricing power, albeit pricing that’s subject to regulation. Despite that, it yields 5.2%.
One risk is shifting patterns of energy consumption due to a move towards permanent homeworking. That could require costly additional capital expenditure if the network needs to be changed to redistribute electricity from previously commercial areas to primarily residential ones.
Income shares with a dividend growth record
While Diageo only yields 2.1%, that would still provide me with a prospective £21 of income each year for a £1,000 investment today.
The Baileys and Smirnoff owner appeals to me for more than just its current yield, though. With its dividend history of increasing payouts annually for more than three decades, I see further income potential ahead. Diageo’s premium brand portfolio gives it pricing power. I think the company could be a beneficiary of people socialising heavily once the pandemic is a memory.
But risks include a move away from alcoholic drinks by many consumers, which could lead to future sales declines. And as with all dividends, a record of past payouts is no guarantee of future ones.
