Investing in UK dividend stocks can be a lucrative source of passive income. Buying a range of stocks like this means that even if a company unexpectedly cuts its dividend, I hope that I will still receive income from other holdings.
With £10,000 to invest, I would split it equally between these five stocks to aim for a return above 8%.
Risks and Rewards
Will the housing market collapse? Will smoking continue to decline? These kinds of worries plague investors in companies such as home builders Khaki and tobacco company Imperial Brands.
I think the concerns are warranted and pose a risk to future earnings. But I also think risk is already priced into companies’ stock prices, as evidenced by their high dividend yields. Persimmon, for example, yields 9.7% and Imperial offers 8%. Both companies are in the FTSE100 and their returns are well above the average offered by their index peers.
There are a lot of things I love about business. Persimmon is a recognized name among homebuyers and has a disciplined financial model with high profit margins. Its latest results for the full year showed a net profit margin of 19%. Imperial is also a high-margin business, thanks to low cigarette manufacturing costs and the pricing power offered by its premium brand portfolio.
I would also invest in two high yielding companies that operate in different parts of the financial services industry.
The first is the asset manager M&G, currently offering a dividend yield of 8.4%. The company is well established and has a large customer base. With assets under management and administration of £370 billion, M&G is a huge business. This ladder can help him make big profits, now and in the future. One of my concerns is that investors are leaving its retail asset management arm in recent years. If this continues, earnings could plummet. But the continued strength of M&G’s institutional business is a source of confidence.
I would also invest in the insurer Direct line. The insurance business model is quite simple and Direct Line steers clear of exotic types of risks that can lead to sudden and unexpected losses on a large scale. Events like the recent storms could further hurt profitability in any given year. But in the long run, I think the company’s brand and underwriting expertise should help it attract and retain profitable business. With a 7.4% dividend yield, I would put Direct Line in my income portfolio and keep it there.
High Yield Trust
Finally, I would put £2,000 into Income and Growth Venture Capital Trust. As its name suggests, it seeks to generate both income and capital growth by investing in a broad portfolio of early-stage companies. Most of these companies are not publicly traded, but I can access them by buying income and growth stocks. Some businesses may fail, which could hurt the trust’s profits, but hopefully it will pick some real winners as well.
Dividends tend to move a lot, but the current yield is 9.6%.
UK dividend stocks with an average yield of 8.6%
With an average return of 8.6%, spreading my £10,000 evenly across these five stocks would hopefully give me an annual passive income of £862. I view this portfolio as an attractive way to increase my passive income streams.
Inflation is coming: 3 actions to try to hedge against rising prices
Don’t get me wrong… inflation is coming.
Some people are scared, but there’s one thing we think we should avoid doing at all costs when inflation hits…and that’s doing nothing.
Money left in the bank can often lose value each year. But for informed savers and investors, or considering putting their money in is the million dollar question.
That’s why we’ve put together a brand new special report that unveils 3 of our best sharing ideas in the UK and US to try to better hedge against inflation…
…because no matter what the economy does, a savvy investor will want their money to work for them, inflation or not!
Even better, we’re offering this report completely FREE today!
Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK recommended Imperial Brands. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.