The attraction of UK dividend shares for me is their ability to offer passive income streams. Even with a relatively modest capital sum like £1,000, I could buy shares in a couple of blue-chip companies and then sit back and hope for passive income to start coming in regularly.
£1,000 is enough to diversify across several shares. That would help to reduce my risk compared to investing in only a single company. Here are two UK dividend shares I’d buy with £1,000 – I’d split it evenly across the two.
Tobacco giant with 8%+ yield
Tobacco companies are often associated with big dividends. There are several reasons for that. Some investors shun them on ethical grounds, which helps keep the yield higher than it otherwise would be. Cigarette companies produce large cash flows and have limited need to reinvest them in the business. Additionally, risks such as a decline in smoking rates keep some investors out of the shares.
The two main UK-listed companies in the tobacco space are Imperial Brands and British American Tobacco (LSE: BATS). I like both and hold them in my own portfolio. But if I could only go for one with half of my £1,000, I think I would opt for British American Tobacco.
Imperial yields 8.8% compared to BAT’s 8.2%. While that means both are among the highest-yielding UK dividend shares, BAT is the lower-yielding share. So why would I go for it over Imperial in this case?
In short, I see lower execution risk with its business strategy. BAT is pushing ahead with non-cigarette products, with over 16m consumers of its non-cigarette products at last count. But it continues to see strong performance in its portfolio of venerable cigarette brands such as Lucky Strike. In its first half, combustible revenue grew 5.8%.
Imperial’s approach is somewhat different. It has damped down its non-cigarette ambitions. It’s investing in boosting cigarette market share in key countries. I like that as a business strategy for Imperial, but it does leave less room for error than at BAT with more diversified income streams growing rapidly. So, despite the lower yield, if I was only buying one of them, I’d plump for BAT.
UK dividend shares: Legal & General
Another high-yielding blue-chip company I like is financial services firm M&G. But again, investing in just two companies means my risk tolerance would be lower than if I had more diversification. M&G has a limited history as an independent listed company, so I’d be tempted to go for a stock with more trading history on which I could base my judgment.
That’s where insurer and financial services group Legal & General comes in. At 6.2%, its yield is lower than the 9.1% on offer at M&G but is still attractive to me. I like the company’s progressive dividend policy and recent history of not cancelling dividends. That doesn’t necessarily mean these UK dividend shares will keep paying out in future, but I see it as a good signal of intent.
The L&G brand and wide UK customer base are both strengths. They could help the company keep making strong profits for years to come. That can help fund a healthy dividend. There are risks, though, including price competition from new market entrants hurting profitability.