With inflation rearing its ugly head more strongly than for decades, I have been thinking about income shares I could buy to try and boost my income. Here are five UK dividend-paying shares I would consider buying now for my portfolio due to the income prospects they offer me.
Each has a dividend yield of at least 5%. But dividends are never guaranteed. By buying five shares, I could diversify my portfolio.
Insurers
Insurance businesses often generate high cash flows. They take money in from policyholders before having to pay some of it out again to settle claims. Due to their experience and expertise, these businesses are often in a good position to judge the likely cost of settling future claims. That lets them set their pricing at a level that can allow an attractive profit. That in turn enables dividends.
Looking at two insurance companies I would buy now for my portfolio, Direct Line and Legal & General, that theory can be seen in action. Direct Line yields 8.7% while Legal & General is yielding 6.8%. Both increased their dividends last year, although that does not necessarily mean they will do so in future.
One risk I see to profitability is sharply growing car prices. That could push up the cost of settling motor insurance claims, hurting profits. But both businesses benefit from strong brands that can help attract customers. They have large customer bases and deep experience of how to price policies. I would be happy to add both of these income shares to my portfolio today.
Tobacco
Like insurance, I think the tobacco industry has a business model that can enable large dividends. Manufacturing costs are cheap. Taxes and duties are so high that even a large price increase by the manufacturer does not translate to a large increase in the cost of a packet of cigarettes.
Two UK companies are leaders in the field: British American Tobacco and Imperial Brands. They yield 6.3% and 9.0% respectively. That makes them attractive to me as income shares to own in my portfolio. Indeed, I hold both of these shares currently.
But one concern is whether declining cigarette usage could hurt sales and earnings. I think that is likely over time. However, owning premium brands gives both companies pricing power. That can help offset the impact of volume loss on profits. They are also both pushing into non-cigarette product lines. Although there are risks, I continue to find the yield of these two income shares an attractive choice for my portfolio.
Telecoms
The fifth income share I would buy for my portfolio at the moment is telecoms operator Vodafone. It has a dividend yield of 5.8%.
Telecoms involves high costs to build and maintain networks. That eats into Vodafone’s profits and could pose a risk to future dividends. But such networks enable it to serve tens of millions of customers. The large customer base and strong brand are attractive to me. That is why I would consider buying Vodafone for my portfolio.
5%+ yielding income shares
All five of these income shares yield over 5% at the moment. I do not know what their future dividends will be, but by buying a range of companies in different industries, I hope I can set up more passive income streams for coming years.