One of the easiest ways of generating passive income today is investing in dividend shares. With these investments, you receive cash payments (out of company profits) for doing absolutely nothing.
Like the sound of this? Here are three top UK dividend shares to consider buying today.
A rock-solid business
One stock that strikes me as a good pick for a second income right now is Tesco (LSE: TSCO).
It’s currently sporting a forward-looking dividend yield of about 4.5%, meaning a £5,000 investment could potentially generate annual income of around £225.
What I like about Tesco is that it’s a ‘defensive’ business. So, while it does face risks (like competition from discount retailers), its profits and dividends are unlikely to suddenly evaporate.
I also like the fact that the company has a fair bit of momentum right now. In October, the FTSE 100 company raised its profit outlook for the full year.
Tesco shares currently trade at a reasonable valuation. At present, the forward-looking P/E ratio is about 11.
At that multiple, I see the potential for share price gains too.
It’s worth noting that analysts at HSBC have a price target of 340p.
A renewable energy play
Next up is Renewables Infrastructure Group (LSE: TRIG).
This is a listed investment company that owns a broad portfolio of wind and solar farms across the UK and Europe, and tends to have inflation-linked contracts. Its aim is to provide steady, sustainable returns to investors through dividends.
For 2024, analysts expect Renewables Infrastructure Group to pay out 7.37p per share in dividends to investors (a yield of about 6.7% currently). That means that a £5,000 investment at the current share price could generate annual income of about £340.
That’s assuming the forecast is accurate. Sometimes, analysts’ forecasts can be a little off the mark.
Now, given the global shift to renewable energy, I think this company has a bright future ahead.
However, there are some stock-specific risks to be aware of here. For example, poor weather conditions could result in lower energy generation and cash flows/dividends at some stage in the future.
A small company paying big dividends
Finally, the third stock I want to highlight is Keystone Law (LSE: KEYS). This is a small-cap company in the legal space that operates a scalable platform business model.
It’s currently forecast to pay out 20.4p per share in dividends next financial year (a yield of about 4.4%), meaning a £5k investment could potentially generate annual income of about £220.
Investors often overlook the small-cap space when investing for passive income. However, this can be a mistake as there are plenty of smaller companies that are rewarding their investors with big cash payouts.
Keystone Law is a great example here. Just a few months ago, it announced a ‘special dividend’ of 12.5p per share alongside its regular H1 dividend of 5.8p per share (which itself was up 12% year on year).
The company noted at the time that it had strong momentum in its business.
One risk here is that the company is vulnerable to an economic slowdown. Only on Friday, in fact, did we see worse-than-expected retail data showing the UK economy was failing to grow in October.
I think the key is to take a long-term view, and focus on the dividends.