Some of my favourite passive income ideas are UK dividend shares. I like the juicy dividends and the fact I don’t need to work for the income. Here are five I would consider buying now for my portfolio to try and increase my passive income streams.
The insurer and financial services company Direct Line (LSE: DLG) has built an iconic brand. Even in an age when many customers shop for insurance online rather than over the phone, the red telephone logo and brand identity help build customer awareness and loyalty.
That is good for the company’s business because it can help reduce customer acquisition costs. It can also help lower customer churn. Both of those things can be good for Direct Line’s profits, which last year came in at £367m after tax. Profits help fund dividends and this is where I think things get interesting with Direct Line from a passive income perspective. With a yield of around 8% lately, the company has been offering one of the more attractive payouts in the FTSE 100.
All shares have risks and that’s true for Direct Line too. The rising cost of second-hand vehicles is making it costlier to settle some claims. That could lead to lower profits. But I would happily consider Direct Line for my portfolio.
Another of the bigger dividends in the FTSE 100 comes from Imperial Brands (LSE: IMB). As its former name Imperial Tobacco indicates, the Bristol company has a global tobacco empire. It owns brands including Winston, West, and John Player Special. Tobacco companies are able to generate high free cash flows and that can fund chunky dividends. Even after a big cut last year, the Imperial yield has been hovering close to 9% recently.
That may partly reflect an obvious risk tobacco companies like Imperial face. A decline in the number of smokers in many markets threatens both revenues and profits. Imperial is facing this head on. But its strategy, of trying to increase market share in some countries, could be a risky one. It may end up with Imperial simply getting a comfier seat on a boat that’s still sinking. Then again, maybe cigarettes and cigars will endure for decades. Meanwhile, Imperial may be able to grow volumes. It also has pricing power, so can partly mitigate declining smoking rates by increasing prices.
Although there are clear risks here, Imperial’s yield is attractive to me. I hold it in my portfolio because of the passive income stream it provides.
I bought Diversified Energy (LSE: DEC) for the first time this year. With its large network of oil and gas wells, the company has been pumping money out of the ground – and sharing a lot of it with shareholders in the form of dividends. The yield has been in the double-digits recently, making it one of the most lucrative passive income ideas I own.
On top of that, Diversified has raised its dividend over the past several years. It also pays out quarterly. Both can be attractive when considering passive income, although past dividends are no guarantee of future ones.
There are risks here too. When wells reach the end of their working life they need to be capped. That costs money. With Diversified operating around 67,000 wells, over time those capping costs could add up to a large amount. That may hurt the company’s profits. Energy prices can also be volatile, as we have seen in 2021. That could also lead to lower profits in future.
The telecoms operator Vodafone (LSE: VOD) has a large network across many markets. In the UK alone it has over 18m customers and that’s just one of the company’s markets. It has spent decades building a leading position in European telecoms and that has led to a large, profitable business.
That profitability allows the company to reward shareholders with dividends. With the payout lately being north of 6% of the Vodafone share price, I find it attractive. The company is one of the passive income ideas I would consider buying for my portfolio now.
One concern I have, though, is the capital intensive nature of the business. Bidding for licenses, and building and maintaining networks can be very costly. Not only could that dent profits in future, it has also led to Vodafone carrying substantial debt. Servicing that could threaten the dividend, which the company already cut several years ago.
Set against that, Vodafone continues to generate enormous cash flows. I think it can do so far into the future. New technologies such as 5G may increase its ability to make profits as users sign on for more services.
To help reduce my risk, I try to diversify my portfolio across different business areas.
When it comes to pharma, one of the companies I would consider buying for my portfolio is GlaxoSmithKline (LSE: GSK). Offering a yield of around 5% lately, I think the company could be a handy addition to my passive income streams.
2022 could be transformative for GSK. It is planning to split into two companies. The combined dividend yield could be lower than the current GSK one. However, I reckon the strategy could help the company focus more on two distinct areas, pharma and consumer goods. In the long term, if that unlocks more value than the current structure, I reckon the move could actually be good for the dividend.
But there is a risk the break up could distract management attention and bring additional costs such as professional fees. That could lead to lower profits.
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Christopher Ruane owns shares in Diversified Energy and Imperial Brands. The Motley Fool UK has recommended GlaxoSmithKline and Imperial Brands. 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.