Lots of UK shares pay dividends. Basically that is a way for companies that generate more cash than they need to run their business to reward their investors.
That helps explain why dividends are never guaranteed. Companies might not generate enough spare cash, or may have other uses for it.
But lots of UK shares do pay dividends. In fact, just the 100 biggest companies listed on the London market (the FTSE 100) pay out well over £1bn per week on average in dividends.
That can be a lucrative source of passive income. So, what does someone have to do to get their hands on some of it?
Matching the method to your means
This, I think, is where things get interesting!
Beyond owning the shares, someone does not need to do anything to get dividends they pay. So, they can put money into the share, sit back, and then let the dividends flow (depending on whether that company pays them).
This, then, is truly what I would call a passive income source.
Not only that, but the amount invested can vary depending to someone’s means. They can put in as little or as much as they choose.
A fiver a day can go a long way!
Say, for example, that someone wants to invest £5 per day in UK dividend shares.
They could do that through an investing platform such as a share-dealing account or Stocks and Shares ISA.
As dividends are never guaranteed – and shares also carry the risk of capital loss – a smart investor will spread that amount over different shares.
Imagine they keep up this fiver a day investment habit, compounding (reinvesting) dividends at 6% annually.
Doing that for a decade, the portfolio should be worth around £24k. At a 6% yield, that would equate to an annual passive income of roughly £1,443, or nearly £28 per week.
On the hunt for income shares to buy
As well as diversifying, it matters what shares an investor buys – and what they pay for them.
One UK income share I think merits consideration is FTSE 100 financial services firm Standard Life (LSE: SDLF), recently renamed from Phoenix Group.
The company’s business model is both simple and complex.
It is simple because it basically consists of managing retirement and pension accounts for millions of people – roughly one in five British adults, in fact.
That is also complex, though, as managing hundreds of billions of pounds in assets involves risk.
For example, Standard Life has a large mortgage book. So, if the property market suddenly weakens, it could need to write down some of its valuations, eating into earnings.
Still, Standard Life is a sophisticated organisation with deep experience of the financial markets. That has helped it grow its dividend per share annually in recent years, something it aims to keep doing.
Its large customer base and powerful brands could help it as it aims to achieve that goal. Even at today’s level, the dividend yield is a juicy 7.1%.
