Two 6%+ yielding UK dividend shares I’d buy with £500

Our writer details how he would invest £500 in two well-known UK dividend shares today to try and benefit from their future income potential.

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Holding UK dividend shares allows me to earn passive income from the hard work of blue chip companies. If I had a spare £500 to invest today with the aim of getting some dividend income, I’d consider splitting it equally across two well-known FTSE 100 shares.

Vodafone

The first is telecoms operator Vodafone (LSE: VOD). The company has a strong brand that helps it attract and retain customers across many markets. While the UK is important to Vodafone, it is only one of many countries in which the company operates. Last year, for example, the UK accounted for only 13% of revenues. The company counted 178m customers on its books, most of them overseas. That sort of scale allows it to invest in large networks that can bring substantial revenues and profits.

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Revenues in 2021 came in at €43.1bn. Profit was €536m, which I feel is pretty meagre given the size of the revenues. Nonetheless, basic earnings per share came in at 38c. That allowed for a dividend per share of 9c. Based on the current Vodafone share price, that means the London-listed shares offer a yield of around 6.3%. In other words, if I put £250 into Vodafone shares today, I would be hoping for future dividends of about £15.60 per year.

But dividends are not guaranteed and one risk I see in telecoms generally is the high capital expenditure required to install and maintain networks. Vodafone has funded some of that with debt, which at the end of September stood at €44.3bn. Servicing that debt could hurt future profits. But I also hope the capital expenditure can support high-quality modern services that can attract customers and help the company charge premium prices. That could help Vodafone improve its profit margins.

British American Tobacco

Another FTSE 100 stalwart I would buy for my portfolio today is British American Tobacco (LSE: BATS). Its yield of 7% means that if I invest £250 in the company now I would hope to receive annual dividends of about £17.40.

The company has increased its dividend each year for over two decades. But dividends are never guaranteed. They require a company to earn money to pay them. I do think declining cigarette smoking rates in many markets could hurt both revenues and profits at BATS in future.

On the other hand, it has been trying to compensate for this by aggressively expanding its non-cigarette product lines, such as vaping. In the first nine months of last year, the company added 3.6m new customers for its non-cigarette products. Meanwhile, it reported that global cigarette volumes for the year were expected to be broadly flat. Declines in some markets were offset by growth in markets such as Indonesia. That could help to support payouts.

I would buy these two UK dividend shares today

I already own BATS. I would happily buy more BATS and add Vodafone to my portfolio. A £500 investment split evenly across the pair would hopefully earn me around £33 a year in passive income in future.

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