Passive income is money one receives without working for it. Yes please! But many supposedly passive income ideas actually involve a fair bit of work. That’s why I like investing in UK dividend shares. I can sit back and simply wait for any passive income to pile up.
Here are three UK dividend shares I would consider buying for my portfolio today as passive income ideas.
Not everyone is comfortable investing in tobacco shares, for ethical reasons. Combined with the risk of declining smoking rates in many markets leading to falling revenues and profits, that means many tobacco shares offer attractive yields. While I like the American giant Altria with its 7.4% yield, an even better yield is on offer from a London-listed name with large American exposure.
The company in question is British American Tobacco (LSE: BATS), which yields 8.1% at the current BATS share price. The company pays out equal quarterly dividends, which makes it attractive to me among passive income stocks as the income flow is steady. Plus it has increased its dividend annually every year since the turn of the century. This year the dividend grew by 2.5%.
But dividends are never guaranteed. Declining cigarette sales could hurt its revenues and harm its ability to sustain the dividend while paying down its £40bn net debt. While the company actually grew its combustible revenues in the first half by 5.8%, much of that was due to shifts in price and product mix, not improved volumes. So a lot rides on how the company continues to deal with shifts in cigarette consumption and whether it can quickly grow its non-cigarette business. New category growth in the first half was 40%, which I find encouraging.
Legal & General
Among financial services companies, a number of options attract me as passive income ideas.
I’d consider adding Legal & General to my portfolio even though it isn’t the highest-yielding financial services share available. But with a yield of 6.3%, the dividend is still attractive to me. What I particularly like about Legal & General compared to some of its peers is its commitment to paying dividends. The company didn’t cancel payouts during the pandemic when some other listed insurers did. It has also set out plans to increase its dividend in coming years.
But dividends are never guaranteed, and risks include any slip in underwriting quality eating into profits. On the positive side, I like the company’s strong brand, broad customer base and well-honed business model.
The third of the passive income ideas I would consider for my portfolio today is energy network operator National Grid. With its 5.3% yield, I consider this to be an attractive dividend payer that benefits from a reasonably stable business.
That doesn’t mean it’s risk-free. Shifting patterns of energy consumption could require costly capital expenditure to modernise networks. But I like the firm’s broad customer base and unique assets. That should give it a sustained ability to make profits and pay dividends.
Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco and National Grid. 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.