Passive income ideas come in all sorts of shape and sizes. Some, to me, seem much more realistic than others. One very old passive income idea that is still widely used is buying shares that pay dividends. I own a number of different UK shares in my portfolio primarily for their passive income potential.
With a long-term approach to investing, I think owning UK dividend shares can offer massive potential for passive income.
Here’s why.
Reason 1: some big British companies pay a lot of dividends
One of the complaints investors have about the London stock market is a lack of growth opportunities. Why does London not have an Nvidia or an Alphabet?
I think that is a fair enough criticism. But there is a silver lining.
Many large London-listed companies have limited growth opportunities. But they still generate sizeable amounts of spare cash.
This means that a lot of blue-chip UK shares have generous dividends as a way of distributing much of the spare cash they produce.
British American Tobacco (LSE: BATS) and rival Imperial Brands may not have strong growth prospects in their core businesses. But both shares yield over 5%.
Reason 2: dividends can grow over time
Not only that, but British American has grown its dividend per share every year for decades. It aims to keep doing so, although dividends are never guaranteed.
For the sort of long-term investor I mentioned above, the potential for a company to grow its dividend over time can be transformative when it comes to building huge passive income streams.
Say someone put £10k into British American at the start of 2000, when its share price was around £3.52. This year’s dividend of £2.40 would equate to an incredible 68% yield on that initial investment.
In other words, the one-off £10k investment (now worth over £120k due to share price growth, by the way) would be throwing off some £6,800 of passive income this year alone.
Reason 3: UK shares offer juicy yields
Many investors have ethical concerns and will not want to buy a tobacco stock. For others, there is the more prosaic concern about what declining cigarette usage rates will mean for revenues and profits.
British American’s premium brand portfolio helps give it pricing power, but will it be able to deliver on its goal of ongoing annual growth in the dividend per share? Or might it slash its payout, like Imperial did in 2020?
The good news for investors is that British American is only one of many UK shares that offer high yields.
The FTSE 100 has hit an all-time high this year, pushing its yield down to 2.9%. But that still makes the index of leading UK shares far more lucrative than its US equivalent when it comes to passive income. Currently, the S&P 500 yield is only around 1.1%.
Plus there are plenty of blue-chip British shares that surpass the FTSE 100 yield.
I mentioned two above, but others are even more lucrative, like Phoenix Group with its 7.4% yield and Legal & General, offering 8.1%.
Massive potential in 2026 and beyond
With some blue-chip UK shares offering high yields already, alongside the potential for ongoing dividend growth, I think there is serious passive income potential for the long-term investor!
