I think one of the best ways to generate a passive income is to invest in UK shares. Unlike other passive income strategies, stocks and shares require just a few pounds of upfront investment, and they are available to anyone over the age of 18.
With that in mind, here are two UK shares I’d buy for my passive-income portfolio today.
Passive income champion
The first company on my list is consumer goods giant Unilever (LSE: ULVR). With a dividend yield of 3.5%, at the time of writing, the firm is one of the most attractive income stocks in the FTSE 100.
The dividend is backed by income from the group’s portfolio of consumer brands. Most of these are billion-dollar brands, which are well-known and loved by consumers. This gives the company a solid competitive advantage, making it an even better income investment, in my opinion.
One of the key threats facing any income investment is the threat of falling income. As dividends are paid out of company profits, the business will have less cash available to return to investors if profits fall. This could lead to a dividend cut.
However, in the case of Unilever, I think it’s unlikely the company will ever see a substantial drop in income. Indeed, even in a severe economic depression, consumers are unlikely to stop buying products such as ice cream and deodorant.
That said, consumers may reduce their purchases if costs start to rise significantly. This is the most considerable risk facing the enterprise today. Rising prices could put consumers off purchases and increase group costs. This double headwind could hurt the company’s profit margins and put income under pressure.
Still, I’d buy Unilever for my portfolio of passive income UK shares today despite these risks.
UK shares to buy
The other company I’d buy is the asset management group Schroders (LSE: SDR). This stock has a dividend yield of 3.3%, at the time of writing. Earnings per share cover the payout 1.7 times. I reckon that leaves plenty of room for dividend growth in the years ahead.
Schroders is one of the countries most storied wealth managers. This is its competitive advantage. It should also benefit from rising stock markets and an increasingly wealthy elderly population. These two factors should help the company grow assets under management and, as a result, fee income.
These factors could help support dividend growth.
The asset management industry is incredibly competitive, which suggests the company will have to work hard to maintain market share. It could also face pressure from lower-cost competitors, offering clients the same service with a reduced fee. Regulatory challenges could also increase costs and reduce profits.
Even after taking these risks and challenges into account, I’d buy the company for my passive income portfolio today. That’s because I believe it’s one of the best UK shares to buy for income.
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Rupert Hargreaves owns shares of Unilever. The Motley Fool UK has recommended Schroders (Non-Voting) and Unilever. 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.