Recently, I’ve been scouting out cheap UK shares to buy to help me achieve my goal of generating a passive income stream. There are plenty of options. Indeed, many blue-chip FTSE 100 stocks currently offer dividend yields above the market average of 4%.
I’m planning to take advantage of this by acquiring a basket of these shares to generate a passive income for life.
Passive income stream
The first blue-chip income stock on my radar is British American Tobacco. At the time of writing, this stock supports a dividend yield of around 8%. The distribution is well covered by earnings and free cash flow from operations.
This tobacco giant also has a strong track record of above-inflation dividend growth. The fact that the enterprise hasn’t had to cut its dividend in 2020 stands testament to the strength of the payout, in my opinion.
Some investors might want to avoid British American due to ethical considerations. Luckily, there are plenty of other UK shares with similarly attractive dividend credentials. Two examples are mining giants Rio Tinto and BHP.
Five years ago, these companies were in trouble. A decade of excess spending had left the businesses with significant levels of debt. A commodity price crash compounded problems. Their managements had to take evasive action to restore investor confidence.
The actions yielded the desired results. Both companies have significantly reduced borrowings, and cost-cutting efforts have helped improve profit margins. Now, they almost have too much cash. Rio and BHP are returning vast wedges of money to shareholders, and cash piles are growing. Both stocks currently support dividend yields of more than 5%. That’s why I think they could be fantastic opportunities for a passive income portfolio.
High-quality UK shares
BAE Systems was one of the UK’s top income stocks. That was until the business cut its dividend earlier this year. Thankfully, the company managed to avoid the worst of the pandemic, and management has now restored the distribution.
What’s more, the UK government’s commitment to increase military spending over the next five years, is a hugely positive development for the country’s largest arms suppliers. I reckon this bodes well for future dividend growth. With a dividend yield of 4.6% already on offer, I think the enterprise has all the hallmarks of a passive income champion.
Finally, I’m considering GlaxoSmithKline for my passive income portfolio of UK shares. With a dividend yield of 5.8% at the time of writing, the stock’s level of income is above the market average. Moreover, the pharmaceutical group’s defensive income stream reassures me this dividend is here to stay. Throughout the coronavirus crisis, Glaxo stuck by the payout. That’s why, in these uncertain times, I’m willing to trust the pharmaceutical giant to provide a passive income.
Rupert Hargreaves owns shares in British American Tobacco. The Motley Fool UK has recommended GlaxoSmithKline. 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.