Investing in shares to create passive income is a major goal of mine. To achieve a sustainable passive income, I need to understand the stock market and do my research. That should help me unearth good investments that I hope can grow year after year.
So, these are the UK shares I’d buy and hold for at least a decade to create and grow a passive income stream.
Two top UK shares
To choose what I think are the best two companies, I’ve looked for those with high dividend cover, a history of dividend and earnings growth and yields above 3%.
Meeting these criteria were UK shares such as MTi Wireless, Belvoir, Hargreaves Services, Domino’s Pizza, and Intermediate Capital, as well as a number of investment trusts.
But two other shares particularly caught my eye – Rio Tinto (LSE: RIO) and Morgan Sindall (LSE: MGNS). The former has an earnings per share (EPS) compound annual growth rate (CAGR) of 44.7% over the last three years. This is very high, and has helped underpin dividend growth. The dividend yield is already very high at around 10%, but it’s covered by earnings. Earnings cover the dividend by more than 1.5 times. Along with a reasonable price-to-earnings ratio (P/E) of six, Rio Tinto looks like a top buy-and-hold passive income share for me.
But mining is an industry with boom and busts and there’s a risk we’re at the top of a cycle right now. Yet with electric cars needing copper and other metals in increasing amounts, there’s going to be demand for Rio’s output for a long time to come.
The company digs for copper, aluminium, silver, gold, bauxite and diamonds, but it’s best known for iron ore. That makes it reliant on steel production and Chinese construction for further growth. This could be a risk, especially in light of the recent debt problems at Chinese developer Evergrande.
The stock isn’t without risks and has environmental challenges to face up to. Nonetheless, looking from the point of view of creating passive income, it looks like a top share for me to buy right now and then hold for a decade. I’m very tempted to buy the shares.
Investing for passive income
Shares in construction and infrastructure group, Morgan Sindall, yield around 4% and are on a P/E of 10, indicating they could be quite good value. The three-year EPS CAGR is much less than Rio’s, but is still respectable at 12.3%. Also, the dividend – which has been growing well – is covered more than twice by earnings. All in all, it looks like a very promising passive income investment.
The group is doing well operationally and financially, which bodes well for the future. It recently reported record full-year results with double-digit profit growth being driven by a modest increase in revenues and improved operating margins. It had net cash of £358m as of 31 December 2021, which suggests a balance sheet in good shape. Again, I’m tempted to buy.
Rio Tinto and Morgan Sindall are my top picks to buy and hold for a decade to create a passive income from UK shares.