A bit of extra income always sounds good to me. That’s one of the reasons I invest in UK income shares.
While it can be tempting to spend the extra income, over time it can add up to substantial growth of my original investment. Here is how I would invest £2,000 in UK income shares today in the hope of turning it into £3,000.
Sectoral diversification
I would want to reduce my risk by investing in diverse shares. Sometimes a whole sector can fall out of favour. So by diversification I don’t just mean between companies, but also sectors.
With £2,000 in hand I would likely choose four names, putting roughly £500 in each of them.
Choosing high-yield sectors
Then I would look at which sectors offered a high yield. It is easy to find information about the highest yielding shares, so I would likely start there and see what sectors cropped up.
One point to make here is that such data is often backwards looking. That is a useful guide. But for my income plan, I would pay attention to the possible future payout rate. Dividends are never guaranteed, but I would pay attention to any likely shifts in profitability.
Currently, four sectors I would pick for UK income shares are tobacco, financial services, energy, and retail.
UK income shares I’d pick
For tobacco, I would buy into Imperial Brands. A decline this week due to concerns about possible changes to US nicotine level rules provides me with a buying opportunity. It also highlights longer-term risks that lower demand could reduce profits in future. A yield of 9.4% suggests my £500 could generate around £47 annually in passive income.
In financial services, I would choose M&G. The company pays a dividend equivalent to 8.6% of the current share price. So £500 would earn around £43 a year at that level. M&G recently increased its dividend by around 2%. However, one risk is that any economic downturn could lead to a reduction in investment activity, which would hurt M&G’s profits.
For energy, I’m tempted by the yield of Diversified Oil and Gas. But its limited history as a listed company means I don’t feel comfortable estimating its future payout level. So I’d probably plump for BP. The oil major cut its dividend last year, but still offers a prospective yield of 5.4%. That would equate to £27 a year for my £500 stake. BP’s move into renewable energy might boost future returns – but if margins are lower, it could damage them.
Finally retail operator Tesco yields 4.4%, or around £22 a year on a £500 investment. Tesco is a bellwether UK retailer that last week maintained its final dividend. But as the results showed, risks include increased costs for online fulfilment.
Passive income streams
Taken together, these four UK income shares could offer me around £139 in passive income. That might not sound much, but it would help me get to my target of turning £2,000 into £3,000. If the dividends were maintained, I could achieve that target in under seven years.
It could be faster if dividends are increased, although they could also be cut or cancelled. Another way to speed up achieving my goal would be to reinvest the dividends instead of keeping them in cash.
