4 simple passive income ideas and why I like them

Our writer sets out four well-known UK dividend shares he’s considering for his portfolio as passive income ideas and explains what he likes about them.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Passive income is money that comes in without having to work for it. That might sound too good to be true, but there are lots of sources of passive income. One of my favourite passive income ideas is investing in UK dividend shares. I like that because it means I can benefit from the hard work and success of some of the UK’s leading companies.

Here are four passive income ideas I would consider using for my portfolio right now – and why I like them.

Financial services: Legal & General

The multi-coloured umbrella of insurance and financial services provider Legal & General (LSE: LNG) is instantly recognisable to generations of people. That’s good for the business as it helps it to attract and retain customers without needing to spend as much money on marketing as newer market entrants like fintechs.

That’s not the only attractive thing about the company. Its business model, especially in investment management, has enabled it to post strong revenue and profit gains over the past decade. The company has been good at passing this on to shareholders in the form of dividends. Unlike many insurers, it didn’t cancel or postpone its dividend during the pandemic. Currently, the shares offer a dividend yield of 6.2%. The company has also set out plans to keep raising its dividend in coming years. But dividends are never assured and the company does face risks. These include pricing pressure in the insurance market, which could depress profits.

Smoking products: British American Tobacco

Tobacco can be a good source of passive income. Tobacco companies are out of fashion and some investors shun them on ethical grounds. That has deflated share prices, pushing up dividend yields. On top of that, there’s a risk that declining smoking rates in many markets could hurt revenues and profits. That weighs on the share prices of leading UK tobacco companies.

But I still see tobacco companies as good passive income ideas for my portfolio. Consider as an example British American Tobacco (LSE: BATS), a share I hold at the moment. The company owns a portfolio of brands including Lucky Strike. The mixture of brands allows the company to target different markets and a customer base with a range of spending power. Premium brands also give the company pricing power. That means it can rely on brand loyalty to raise prices without damaging sales too much. That’s attractive in any industry, but in one like tobacco where customer demand is declining, it’s imperative to maintain profits. It can also help offset input cost inflation, a risk for the profits of many consumer goods companies right now.

With quarterly dividends and a dividend yield of 8.1%, British American Tobacco is one of my favourite passive income ideas. It has raised its payout annually for over 20 years. It’s also working hard to develop its non-cigarette business, which could help mitigate the revenue and profit impact of declining cigarette sales. But even with its attractive history of raising dividends, they’re never guaranteed.

Energy conglomerate: DCC

While the company flies below the radar of many investors, one of the passive income ideas I would consider for my portfolio is conglomerate DCC (LSE: DCC). It operates in fields ranging from energy distribution to healthcare.

With a yield of 2.6%, DCC is much less rewarding than some of the other names on my list of passive income ideas. So why would I consider buying its shares for my holdings? A look at the track record illustrates what I like about the company. It has been raising its dividend annually for several decades. Nor are these increases tokenistic. Last year, in the midst of the pandemic, the company grew the dividend by 10%.

The reason I like DCC isn’t really its dividend, though, so much as what it says about the business and its future income potential. The company has strong management, a proven business model, and a leading position in markets with high barriers to entry, such as gas distribution. I think that combination of factors could help it produce strong profits for years to come. That can hopefully support a growing dividend.

But there are risks. One is the volatile gas price, which could eat into profits in the gas distribution business depending on how DCC balances its supply contracts and meeting customer demand.

Telecoms: Vodafone

Many people complain about high mobile phone bills. But those bills translate into high profits for many mobile phone companies. That can be rewarding for shareholders.

The fourth of the passive income ideas I would consider for my portfolio at the moment is such a company, Vodafone (LSE: VOD). The well-known mobile phone company benefits from strong brand familiarity and a wide network not only in the UK but also overseas. Bigger demand for services including 5G and flexible working data packages could help the company grow both revenues and profits in coming years. The Vodafone dividend reflects the lucrative nature of this business. The Vodafone yield currently sits at 7%. That’s well above the average for FTSE 100 shares. 

But building and maintaining a phone network is expensive. The Vodafone balance sheet is groaning with debt. The company has already reduced its dividend in the past several years. Further capital spending or debt servicing requirements could lead to another cut.

Putting my passive income ideas to work

One of the reasons some people dream of passive income but don’t achieve it is because they don’t take action.

Investing in UK dividend shares is a simple way to hopefully start generating passive income. I’d consider all four of these ideas for my portfolio today. I already own one of the companies and would consider adding more. I’d also think about buying the other three UK dividend shares, then sitting back and waiting for passive income to start coming my way. I’m happy to receive income while the hard work is done each day by talented employees at leading companies.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.

More on Investing Articles

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

2 soaring dividend shares to consider for both growth and income!

This Fool's spotted a rare occurrence: two dividend shares delivering impressive growth while maintaining attractive yields.

Read more »

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
Investing Articles

After crashing 40% in a year, is this a bargain basement value stock?

This once-beloved growth stock has fallen from grace as its sales momentum stalls, but after multiple price crashes, is it…

Read more »

Shot of an young mixed-race woman using her cellphone while out cycling through the city
Investing Articles

Simple truths about starting an ISA

Dr James Fox explains how investors can open a Stocks and Shares ISA and aim for long-term wealth generation. Getting…

Read more »

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

Here’s how I’m using my ISAs to target retirement riches

A comfortable retirement's on my mind and I'm using my ISAs to help me get there. But while my cash…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

134,000 reasons why I prefer FTSE 100 stocks over cash savings!

The results are in! Investing in FTSE 100 stocks can be a superior way to build wealth than saving, as…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Here’s how long it’s taken £1k of Nvidia stock to turn into £10k today!

Our writer explains how money invested in Nvidia stock less than three years ago has grown in value over tenfold…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
US Stock

3 red flags I’m seeing right now for the S&P 500

Jon Smith points out some concerns he has with the S&P 500 at current levels and picks one stock he's…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

UK dividend shares are outperforming US tech stocks!

UK dividend shares aren’t just for passive income investors. Over the last 12 months, they’ve been outperforming their US tech…

Read more »