How I’d aim to generate a rising passive income from UK dividend shares

I think that creating a portfolio of FTSE 100 stocks will build a great platform for my retirement, to give me a rising passive income over time.

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I’m keen to generate a rising passive income by investing in a portfolio of UK dividend stocks. That’s my strategy for enjoying a comfortable retirement.

I’m doing this by looking for FTSE 100 companies with sustainable dividends. Particularly those whose payouts are nicely covered by cash flows. I’m also looking for companies with impressive profit forecasts. This suggests to me they should be able to increase their dividends more rapidly over time.

I would aim to buy a diverse range of companies covering many sectors of the market, such as banks, miners, energy, utilities and consumer staples. This should help me build a strong income portfolio, and combat today’s low interest rates.

I’m aiming for a rising passive income

Naturally, there are no guarantees. As we saw in the pandemic, many supposedly reliable dividend companies can dump their payouts in times of trouble. Others, like pharmaceutical giant GlaxoSmithKline, have failed to increase their shareholder payouts for years.

As a result, I would aim to build a portfolio of at least a dozen FTSE 100 stocks and hope the winners more than outweigh the losers. By investing in companies with strong reliable earnings and healthy dividend cover, I have a better chance of generating a rising passive income.

I’d focus on companies with resilient sales growth, higher margins, loyal customers and a strong track record of dividend growth.

In recent years, UK dividend stocks have fallen out of favour. Instead, investors have been chasing fast-growing US technology stocks. That trend is now going into reverse. So-called value stocks are back in favour, such as the banks, miners, oil companies, healthcare stocks and utilities. Many are still trading at attractive valuations. They offer fertile ground for my rising passive income.

I love FTSE 100 dividend stocks

For example, Barclays trades at dirt-cheap 4.1 times earnings. Lloyds Banking Group has a price/earnings ratio of just 5.6. Phoenix Group Holdings (6.6), Anglo American (7.0) and Taylor Wimpey (7.1) are just a few of the many FTSE 100 dividend income stocks available at lowly valuations. These are the companies I would target to generate my rising passive income.

Today’s uncertain economic outlook makes diversification more important than ever. Just look at the ups and downs afflicting dividend income heroes BP and Shell over recent years, as the pandemic and Russian invasion of Ukraine have wreaked havoc.

Personally, I am happy to look beyond short-term volatility like this. I am still 10-15 years away from retirement, so there is plenty of time for my stock holdings to recover. I will reinvest all my dividends for growth while I’m still working. Then start drawing a rising passive income as I wind down.

I’m investing inside a Stocks and Shares ISA, because all my growth and dividends will be tax-free. Given the gaping hole in the Treasury’s finances, I don’t want my retirement income to be at the whims of whoever is chancellor at the time.

My rising passive income will be free of income tax, making my money go a lot further. 

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.

Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has recommended Barclays, GSK and Lloyds Banking Group. 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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