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How I’d generate a passive income from UK shares starting today

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Despite the recent stock market rally, many UK shares continue to have relatively high dividend yields. As such, they can be used to generate a worthwhile passive income in 2021 and in the coming years.

Focusing on yields and dividend growth is important for any income investor, I feel. But building a diverse portfolio that offers less risk and higher reward potential may be equally crucial. It could offer a more stable income stream that has a higher chance of rising in the long run.

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As such, through buying companies with different geographic exposure and that operate in varied industries, it may be possible to obtain an attractive income.

Buying UK shares in different countries for a passive income

The prospects for the UK economy are set to improve sharply following the pandemic. But buying shares in a wide range of regions could be a sound move when seeking to make a passive income. After all, it is extremely difficult at the present time to deduce which countries and regions will bounce back the fastest from the economic challenges of the last year.

Fortunately, it is relatively straightforward to gain exposure to different parts of the global economy. For example, the majority of the FTSE 100’s income is derived from countries outside the UK. As such, it is not necessary to buy companies listed in other countries to gain exposure to different economies. This could make the process of building a diverse passive income stream easier for UK-based investors.

Purchasing UK stocks from different industries

Just as it is difficult to ascertain which countries will recover quickly from present challenges, it is also tough to judge which industries will perform well. As such, it may be prudent to buy UK shares that operate in different sectors to make a more resilient passive income.

For example, banking stocks have really struggled in the last year due to low interest rates and a weak economic outlook. They could experience further difficulties. Or they could be buoyed by an economic recovery that leads to a rise in interest rates over the coming years. Similarly, retailers’ performance may be very closely linked to the end of lockdown measures in the UK because of their presence on the high street. Predicting when social distancing requirements will end is a very tough task.

The cost of diversifying among a wide range of companies has fallen in recent years. As such, passive income investors with varying portfolio sizes may realistically be able to build a portfolio containing a relatively large number of companies. This may provide them with exposure to a broad range of businesses and sectors. And that could reduce their dependence on a small number of industries and/or companies. Over time, this may provide a more resilient and faster-growing income stream as the world economy recovers.

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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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