Over the past few years, I’ve been buying UK shares to create a passive income. My goal’s been to buy the market’s best income stocks. This means companies that, in my opinion, can produce an income stream for the rest of my life.
I think there are only a handful of companies that fall into this bucket. The FTSE 100 is stuffed full on income stocks but, as we’ve found out over the past 12 months, only a small number of these can maintain their payouts in challenging situations.
For example, five years ago it was inconceivable that BT would eliminate its dividend. But that’s just what the company did earlier this year. Investors who had been relying on this business to provide a passive income were left wanting.
Passive income shares
The problems faced by many income stocks this year illustrate why it’s essential to focus on high-quality dividend shares.
Quality has always been a core component of my income strategy. I’ll only buy stocks that have a strong balance sheet, robust profit margins, and international presence. A strong competitive advantage is also highly desirable.
One of the companies that fits into this bracket is Investec. As one of the world’s largest asset management businesses, this organisation has a strong reputation in its sector. It also operates across the globe, attracting wealthy clients from all countries. These qualities have supported the company’s 4.7% dividend yield. I don’t own it yet, but plan to add the stock on weakness at some point.
Two companies I do currently own however, are Prudential and M&G. Both the firms have similar attractive qualities to Investec. They own world-leading brands and operate globally. Prudential, in particular, has a large presence in Asia. By making the most of their strengths, I believe these two groups should be able to produce large cash returns to investors over the next few years.
As well as buying individual shares for my passive income portfolio, I’ve also added some investment trusts. One of these is the Scottish Investment Trust.
This trust owns a portfolio of defensive investments. Utility companies, pharmaceutical groups and gold miners all feature. Together, these assets provide a passive income stream for the investment trust, allowing it to distribute a dividend yield of around 3.2% to investors every year.
What I like about this enterprise is the fact it does all the work for you. All investors need to do sit back and collect the dividend cheque. Investment trusts can also hold back a portion of their income every year to cover dividend payouts in uncertain times, such as 2020.
The Scottish Investment Trust has done just that. By dipping into its reserves, the trust’s been able to maintain its dividend this year. In my view, this quality makes the business a vital addition to a passive income portfolio of UK shares.
Rupert Hargreaves owns shares in Scottish Inv Trust, Prudential and M&G Plc. The Motley Fool UK has recommended Prudential. 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.