UK shares can be an excellent method of creating passive income, especially dividend shares. This type of investment distributes regular income to shareholders in the form of dividends.
I’m currently working out my investment strategy for next year and I’m getting a head start by taking an early look at a passive income plan for my 2023 purchases.
Challenging year ahead
With inflation still a thorn in the Bank of England’s side (as well as for the rest of us), I’m expecting next year to be relatively challenging. A UK recession is almost guaranteed at this stage, most analysts believe.
In addition to rising prices, I’m concerned about the weaker growth that could follow for many companies. So I reckon dividend shares could perform much better than growth stocks.
FTSE 100 dividend payers tend to be large, mature businesses and are also fairly defensive. These are all the qualities that I’d look for in 2023, so that’s where my focus will be.
FTSE 100 dividends
The current Footsie dividend yield is 3.8%. But as that’s just an average, several shares pay much more than that. More than a fifth of stocks in the leading UK index pay above 5% a year in dividends. The top two pay more than 10%.
But with dividend yields, larger isn’t always better. Dividends aren’t guaranteed and can be cut or suspended at any time. That’s why I’m looking at the dividend yield in addition to several other factors.
For instance, I want businesses with solid foundations. In particular, I prefer companies with strong balance sheets, growing earnings, and a long dividend history.
Which shares?
With the aim of holding throughout 2023, I’m thinking of buying Phoenix Group Holdings, Vodafone, Legal & General, Imperial Brands, and SSE. I don’t currently hold any of them.
All five are long-standing brands that meet my criteria. On average, they pay a 7.5% yield, and have been paying consecutive dividends for over 25 years.
In addition, each of these shares operate in a different sector. That should give me some diversification and prevent putting all my eggs in one basket.
I also consider them to have defensive characteristics that should be able to withstand any temporary economic downturn.
£1,000 in dividends
To make £1,000 a year in passive income, let’s consider how much I need to invest.
If I were to buy a FTSE 100 index fund, I calculate that I’d need to invest around £26,300.
But if I buy my five selected shares instead, I estimate that I’d need just £13,333. That’s almost half the investment.
Bear in mind that by picking five shares, it’s a greater risk for me than buying a tracker containing the top 100. If one of my businesses were to suffer a shock or drop in earnings, it would affect my portfolio more than if the same were to happen in a portfolio of 100 shares.
That said, I consider my picks to be relatively low-risk options. And if I keep them for several years, I reckon they will continue to provide a reliable passive income.
