Buying shares that pay dividends is one way I can try to boost my income without having to work harder. A number of UK dividend shares look attractive to me, based on what I see as their long-term income generation potential. Here are two I would add to my portfolio with a spare £1,000.
Direct Line
What is the future for the insurance industry?
There could be bumps ahead. Rule changes to stop price gouging may reduce profits. Increased competition from online fintechs may also squeeze profit margins. But overall I reckon the future for insurance is fairly bright. That is because I expect demand to be robust. Certain types of insurance, like car coverage, are required by law. Others are optional but likely to see continued high demand. For example, few people would buy an expensive home and not want to insure it in case it burnt down.
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On top of that, the insurance market has fairly attractive economics. Long-established underwriters have a good grasp of the average rate of claims and how much they cost to settle. So they can set their prices accordingly and make an attractive profit most years.
An example of such a company is Direct Line (LSE: DLG), which last year made £343m in post-tax profits. That helped it to raise its basic dividend slightly. These UK dividend shares now yield 8.9%. It is also buying back shares, something I see as a management vote of confidence in the health of the business.
The iconic red telephone logo could help the company maintain a competitive advantage when it comes to building customer loyalty. That can translate into ongoing profits. I would happily spend £500 on Direct Line shares for my portfolio today.
Photo-Me
One name among UK dividend shares I think many investors overlook is Photo-Me (LSE: PHTM).
Photo booths may seem like a dying business with many identification documents these days requiring digital rather than physical images. But the company has been moving with the times in growing its digital offering. On top of that, it also benefits from residual demand for physical photos. As we have seen with retro trends for vinyl records and instant cameras, digitalisation can actually lead to a renewed interest in traditional formats once written off as dead.
UK dividend shares with growth potential
The company has been putting its expertise in vending machines to far wider use, which is good for its growth prospects. I like the outlook for its launderette business in particular. People need to wash their clothes regularly. Increasingly small homes could mean that laundrettes actually grow in popularity in coming decades. That could be good for both revenues and profits at Photo-Me.
One risk is slow demand recovery in some Asian markets where lockdowns are still reducing the number of shoppers out and about in areas where the company has its machines. But the long-term business model is attractive for me. A return to profit means the company has brought back its dividend. The dividend yield is 4.1%. I see the potential for growth as the dividend remains far below its pre-pandemic level.
