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Stock market rally: how I’d invest £20,000 now in UK shares to make a passive income

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The recent stock market rally could make it more difficult to make a passive income from UK shares. After all, rising share prices mean dividend yields generally move lower unless shareholder payouts are raised rapidly.

Despite this, it’s possible to earn a worthwhile income return from UK stocks. Especially compared to other assets such as cash and bonds. Through identifying high-yielding stocks with dividends that could grow in the coming years, an investment of £20k, or any other amount, could produce an attractive income stream in 2021 and beyond.

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Making a passive income from UK shares

Many UK shares continue to offer generous dividend yields that could provide a relatively high passive income. For example, FTSE 100 stocks GSK and Vodafone have dividend yields that currently stand at 5.8% and 6.2% respectively. Although both figures have been higher in the past year, they continue to be significantly above the wider stock market’s yield.

Looking ahead, GSK is set to experience significant change due to its planned restructure. This may be causing a degree of uncertainty among investors. But it could provide a buying opportunity while its shares trade at a low price level with a high dividend yield.

Meanwhile, Vodafone’s resilient performance in the current economic crisis may mean that it offers relatively robust dividend growth as key markets experience less disruption over the coming years.

Dividend growth opportunities

While a high passive income today is important for many investors, so too is the potential for dividend growth. SSE and British American Tobacco could deliver relatively strong dividend growth in the coming years. Certainly while their yields stand at 5% and 7% respectively.

SSE plans to raise dividends by at least as much as inflation over the next few years. Due to the loose monetary policy being followed by the Bank of England, this could become increasingly attractive should inflation move higher.

Meanwhile, British American Tobacco expects to maintain a 65% dividend payout ratio. This could mean its dividends move higher at an above-inflation pace. This is due to the pricing power of tobacco products, as well as the growth opportunities within next-generation products such as heated tobacco.

Diversifying when investing in UK dividend shares

Of course, it’s important to diversify when seeking to make a passive income from UK shares. This reduces the impact of one company cutting or cancelling its shareholder payouts on an investor’s wider portfolio.

With many UK shares continuing to offer high yields at the present time, it’s possible to build a solid income portfolio. As such, now could be the right time to invest £20k in FTSE 350 stocks for the long run. They could produce a surprisingly large income stream over the coming years as the economy recovers from its present crisis.

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Peter Stephens owns shares of British American Tobacco, GlaxoSmithKline, SSE, and Vodafone. 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.

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