Making a worthwhile passive income with UK shares is a realistic aim for ISA investors. Certainly, some FTSE 100 and FTSE 250 stocks have cut back on their dividends this year. But many others continue to pay generous dividends that may make them attractive purchases at the present time.
Their appeal could increase over the coming years, as low interest rates look set to stay for a prolonged period of time. By building a diverse portfolio of dividend-paying shares, it’s possible to limit risks and enjoy a growing income return in the long run. These are some of my favourites.
Opportunities to make a passive income from UK shares
FTSE 100 stocks such as BAE and British American Tobacco offer relatively high passive incomes compared to other UK shares. Their yields currently stand at around 5% and 8% apiece, which is above the income returns available across most of the index.
The two companies have experienced uncertain operating conditions of late, as per most of the FTSE 100 and FTSE 250. However, BAE’s market position suggests that it’s well placed to deliver improving financial performance as defence spending globally increases over the long run. It also delivered a resilient performance compared to its peers in the last global recession. Meanwhile, investment in new markets and in acquisitions could improve its competitive position.
British American Tobacco appears to offer a more attractive passive income than other UK shares. It also has a high likelihood of offering a resilient income return in the coming years. Although demand for cigarettes is falling, this is largely being offset by price rises. The end result is a growing bottom line that may mean higher dividends continue to be affordable. British American Tobacco is also investing in next-generation products that may catalyse its dividend growth prospects.
FTSE 100 ISA investing opportunities
Other opportunities to make an attractive passive income from UK shares include mining companies such as Rio Tinto and Polymetal. They have dividend yields of 6.6% and 6.2% respectively. This may mean they’re attractive despite the potential for share price volatility in the short run caused by an uncertain economic environment. Their financial performances this year have been relatively robust. However, they are clearly are more dependent on the global economic outlook than is the case for many FTSE 100 and FTSE 250 shares.
As such, they highlight the importance of building a diverse portfolio of stocks. This year has shown that unforeseen events can take place that impact negatively on a company’s ability to make dividend payouts. ISA investors should, therefore, buy a wide range of UK shares when seeking to make a passive income. This may reduce their reliance on a small number of companies. It may also provide opportunities to generate dividend growth from a broad section of the best businesses.
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Peter Stephens owns shares of BAE Systems, British American Tobacco, and Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020