One of the passive income ideas I use is investing in UK dividend shares. Through buying these, I hope to benefit from any future dividends they pay. If I had a spare £100 a week right now to invest in such shares, here’s how I’d go about it.
Different income prospects
First, I’d think about what sort of future income streams I was targeting. Some dividend shares pay a high yield. Tobacco company Imperial Brands, for example, yields a juicy 8.6%. But its dividend this year grew by only 1% — and that was on top of a swingeing cut last year. By contrast, Judges Scientific has been raising its dividend annually by double-digits in percentage terms recently. But the yield is just 0.7%.
While I like the idea of fast-growing dividend streams, it takes a long time to bridge the gap from 0.7% to 8.6% even with a 10% annual increase. In fact, that would take half a century. Imperial’s dividend isn’t guaranteed, and for that matter, neither is that of Judges. But if I want to build passive income streams fast, I’d choose to go for today’s high-yielders rather than low-yielding shares with a track record of above-average dividend increases.
Choosing UK dividend shares for my portfolio
However, just because a share has an attractive yield today doesn’t mean that it can or will maintain it. Take Imperial as an example. The reason it cut its dividend last year was a combination of overambitious dividend growth historically and limited new profit opportunities within tobacco. I reckon continued declines in cigarette demand in many markets could hurt profits at Imperial in future. That may be bad for dividends.
Still, one of the benefits of putting £100 each week into UK dividend shares would be that it’s enough to let me diversify quickly. So, I could hold companies like Imperial and 8.4%-yielding rival British American Tobacco but mitigate some of the risks through buying dividend picks in other types of business.
UK dividend shares
There’s no shortage of such picks. The UK stock market is currently seen as sleepy by some investors. One upside of this from my perspective is that attractive yields haven’t been wiped out by rapid share price appreciation.
I’d also consider passive income picks such as Legal & General, Direct Line, National Grid, United Utilities and Tesco. I’ve gone into the specifics of why I would consider some of those names for my portfolio elsewhere. But the key point is that, as well as looking at a company’s likely future cash flow potential, I want to make sure that I keep a diversified portfolio. All of those shares have some level of risk. Spreading my weekly £100 over a basket of different companies and industries will help limit the impact on my holdings if a single business or sector suddenly does badly.
Staying the course
Once I’ve found shares I think meet my objectives, I’d start drip feeding my weekly contributions into them. Rather than shuffling my positions too much, I’d keep my eye on the passive income goal and try to just let the positions run, hopefully building my passive income streams over time.