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5 dividend shares I’d pick for passive income

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Passive income is money that comes in without working for it. To generate it, some people let property, while others buy premium bonds. One of my favourite passive income ideas is investing in shares that pay dividends. No share is ever guaranteed to pay dividends, though, and I diversify my holding across a number of companies to help reduce my risk.

Here are five shares I’d pick for my portfolio to generate passive income today.

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Tobacco dividend shares

Company British American Tobacco offers a yield of 7.7%. It also has a track record of annual dividend increases stretching back over two decades, although that is no guarantee of future dividends. The dividend is paid in four equal quarterly instalments, which can make it attractive for planning passive income.

BAT is a huge operation, with revenues of £25.8bn. Despite smoking falling out of fashion in many countries, BAT has grown significantly in the past decade, primarily through acquisitions. It is now investing heavily in developing non-cigarette tobacco businesses. But declining smoking rates remain a risk to revenue.

Passive income from a well-known insurance brand

Insurance is another sector in the stock market often associated with high dividend yields.

I would consider Legal & General for my portfolio thanks to its passive income potential. The company currently yields 6.6% and has set out plans to increase its dividend in coming years, although there is always a risk that changing market demand could alter such plans.

With its iconic name and multicoloured umbrella logo, the company benefits from widespread awareness in the UK. That should help it continue to attract customers. Even in the pandemic last year, it was able to make a post-tax profit of £1.3bn and keep its dividend fully covered by earnings.

Telecom dividend shares

One of the largest dividend payers in the UK stock market is telecom giant Vodafone. The company dished out €2.4bn in dividends last year. With the current Vodafone share price, the dividend equates to a yield of 6.7%.

Mobile phone companies are able to tempt customers into long-term contracts, which can help support cash flows. But one risk is Vodafone’s net debt of €40.5bn. That is a large amount and servicing it could eat up cash which might otherwise fund dividends.

Dividend shares in my shopping basket

While rival Morrisons has got more attention lately due to a takeover bid, the UK’s largest supermarket Tesco attracts me for it 4.3% yield. That makes it one of my passive income ideas.

The company’s market leading position offers economies of scale and future demand for groceries will surely remain high. One risk is the lower profit margins on home deliveries, which have increased as a share of the company’s business.

Passive income from utilities

I’d also consider a utility among my shopping list of dividend shares. Specifically, power infrastructure operator National Grid has a yield of 5.4%. Power networks are very difficult and expensive for a competitor to replicate, so the incumbent operator has an effective business moat.

That doesn’t mean there aren’t risks, though. A mooted regulatory review of UK power distribution could take away some of National Grid’s current role, for example, which might hurt revenues in future.

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Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco, Morrisons, National Grid, and Tesco. 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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