The Motley Fool

Best UK shares: I’d buy these stocks for a passive income

Many people dream of creating a passive income. While it takes work and patience, I believe it can be done by investing in solid shares. I think these two investment trusts, which pay their dividends quarterly, could help. You can take the dividends and reinvest them to benefit from compounding or, of course, take the dividends as passive income.

A quarterly dividend to help with passive income

Merchants Trust (LSE: MRCH) was doing well until Covid-19. This is especially true when you consider that it’s an income-focused trust holding many big names that weren’t flavour of the month. The shares even traded at a premium to their net asset value (NAV). Covid-19 changed this. The shares are now back trading at a small discount of around 3.5% to NAV. Even better for income investors, the dividend yield is over 7%.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The big question is, can this be sustained?

Management are certainly keen to keep the trust’s status as a ‘dividend hero’, a trust that has kept consecutive years of income rises. The trust plans to dip into its savings to protect shareholder payouts this year.

However, this is not sustainable. What is needed is for companies to reinstate their dividends so the trust doesn’t deplete its reserves to pay for the dividend in the short term.

I’m confident this will happen. I would buy Merchants Trust to create a passive income as it holds many dividend-paying companies. The top holdings are GlaxoSmithKline, British American Tobacco, Imperial Brands, BHP Group, and National Grid.

Getting growth from high-flying US tech stocks 

The Bankers (LSE: BNKR) investment trust gives investors something a little different. It has very different holdings than Merchants, with much more of a tilt towards the high-flying, in-favour US tech stocks. Top holdings include Microsoft, Amazon, and Visa.

As a result, the trust has a much lower dividend yield. It currently provides investors with a yield of 2%. The shares in the trust also trade a premium to NAV of around 1.5%. This then is no hidden gem or recovery play. The trust’s shares will need to stay in demand if the share price is to keep going higher.

From a passive income point of view though, it complements Merchants well, as a very different type of trust. The trusts both pay dividends quarterly giving investors a regular cash flow.

I’m pleased to see the Bankers dividend has been rising steadily for the past two decades and I expect this can continue. If the shares fall to a discount to NAV I would be even more tempted to pick some up. It provides both income and growth potential

If you wanted to invest directly, companies such as GlaxoSmithKline also pay their dividend quarterly. Biannual dividend payments are far more common. This could also help make sure you can create a passive income while diversifying your investment portfolio.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Andy Ross owns shares in Merchants Trust. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.