Falling interest rates mean that making a passive income from products such as NS&I Premium Bonds and Income Bonds has become more difficult in 2020. A challenging economic outlook means that this situation may persist over the medium term, as policymakers seek to stimulate the economy through a loose monetary policy.
As such, buying UK shares with attractive dividend yields could be a sound move. They may offer significantly greater income returns over the coming years, with the potential for capital growth.
Here are two such FTSE 100 companies that could be worth buying today within a diverse portfolio of UK shares.
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A reliable passive income
Utility companies such as United Utilities (LSE: UU) have long been popular among investors who are seeking to make a passive income. The company’s business model is relatively resilient and is unlikely to be impacted to the same extent as many of its index peers by a tough economic outlook.
The stock has a dividend yield of 4.7% at the present time. That’s significantly higher than the returns available on products such as Premium Bonds or Income Bonds. It is also relatively attractive compared to the income returns on other FTSE 100 shares.
United Utilities will review its dividend policy under a new set of regulatory conditions. This could impact on its level and growth rate. However, the company’s track record of offering a stable, growing passive income could make it a popular choice among investors at a time when many companies face uncertain operating conditions. As such, it could be worth buying to produce a robust income over the long run.
Improving financial prospects
Tesco (LSE: TSCO) has rapidly become an attractive means of generating a passive income. The company has raised dividends at a fast pace over the last few years. For example, it only resumed dividend payouts in 2018. They have then trebled over the next two years. It now offers a forward yield of 4.2%.
The company’s recent updates show that it is adapting successfully to a changing operating environment. It has increased its online presence. Meanwhile, investment made in new technology seems to be reducing its costs. This could have a positive impact on its margins at a time when investing in pricing remains a necessity for mid-tier supermarkets due to fierce competition within the sector.
Tesco offers capital growth potential as well as a worthwhile passive income. The company is forecast to deliver a 30% rise in earnings next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.5. This suggests that it could be undervalued at the present time. As such, it may prove to be a profitable long-term investment that offers a potent mix of capital returns and income in the coming years.
