One of my favourite passive income ideas is investing in dividend shares. I like the fact that once I buy the shares, any income I receive really is passive. I do not need to do anything – I can just sit back and wait in the hope that passive income will continue coming in.
Here are three UK dividend shares I would consider buying for my portfolio at the moment, due to their passive income potential.
Passive income ideas: British American Tobacco
Cigarette maker British American Tobacco (LSE: BATS) boosted its annual dividend last week – as it has done for over 20 years in a row. Its business is in good shape. Not only is revenue growing, it has reduced the debt on its balance sheet. Indeed the company’s cash flows are so strong that it has restarted its share buyback programme.
The main appeal of British American Tobacco to me is its juicy dividend yield, which stands at 6.3%. To keep paying out its dividends, the company will need to continue generating the right level of cash flow. One risk to that is declining cigarette smoking rates in some markets. That could hurt both revenues and profits. However, for now at least the cigarette business remains huge – indeed, last year it actually showed a 4% revenue growth thanks in part to price rises. The company has also been aggressively developing its range of non-cigarette offering and now has over 18m customers of product lines such as vapour and modern oral.
M&G
Like British American Tobacco, investment manager M&G (LSE: MNG) is a member of the FTSE 100 index. It also has an attractive dividend. The yield is currently 8.5%. The company has said that it plans to maintain or grow its dividend in years to come, although the reality is that dividends are never guaranteed.
I like the fact that M&G has a well-established reputation and brand. That makes it easier and hopefully cheaper to attract and retain customers. The business model also lends itself well to generating cash to fund dividends, in my opinion. With huge amounts of money entrusted to it by clients – at the interim stage it reported £339bn of assets under management and administration – even a modest percentage fee can translate into sizeable profits. Nor is the company resting on its laurels. It announced this week that it is acquiring another investment management firm.
I do see some risk if the company fails to achieve suitably attractive returns for its clients. There was a net outflow of funds from the retail asset management division in the first half of the year, for example. Fewer funds under management could hurt profits.
Unilever
The third of the passive income ideas I would consider is consumer goods giant Unilever, the owner of iconic brands including Domestos and Marmite. The company yields 3.9% and pays out dividends quarterly.
Over the past couple of years, Unilever has stumbled slightly. There is a risk that cost inflation could hurt its profit margins. In its results last week, it revealed that its operating margin last year slid by 0.1%.
There was better news when it came to dividends, though, with the payout growing by 3%. I see Unilever as an attractive passive income idea for my portfolio, both now and hopefully in the future too.
