4 UK shares I’d buy for a passive income

Dividends can provide an excellent passive income. Harshil Patel considers several strong candidates.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Dividends are an important factor for long-term investing and they’re key to earning a passive income from UK shares. Let’s consider the FTSE 100 index. Over the past 25 years, the FTSE 100 returned 6% per year including dividends. But, without dividends, it returned just 2.3% per year. Quite the difference.

I hold many growth stocks in my Stocks and Shares ISA, but I also like to diversify by owning dividend paying shares for a passive income.

My favourite passive income shares

To generate a passive income, I look for shares that provide a dividend yield of at least 5%. In addition, its even better if they have been consistent dividend payers over many years. Of course, dividends are not guaranteed and can be cut at any time.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Stocks that fit these criteria include the global commodity giants Rio Tinto and BHP Billiton. I like that Rio Tinto provides a forecast rolling dividend yield of over 9% and BHP distributes almost 8%. It’s also good to see that both have consistently provided dividends to investors over the past 10 years.

It could be a decent time to look at these mining giants given their cyclical nature. Several major countries including the US are significantly increasing infrastructure spending, and demand for commodities could be robust.  

In addition to providing high dividends, they both display good quality metrics. In particular, they offer a double-digit return on capital and strong operating margins.

A word of warning, however. Iron ore prices are approaching multi-year highs and any decline over the coming years could impact profitability and dividend yields for Rio and BHP.

Building passive income

My favourite UK housebuilder stock, Persimmon (LSE:PSN), provides an excellent passive income. It offers a forecast rolling dividend yield of almost 7.5%. It’s also pleasing to see that it has a consistent dividend record over the past five years.

Much like Rio and BHP, Persimmon offers investors a high-quality share with a double-digit return on capital. It also offers a decent 24% operating margin, and an undemanding price-to-earnings ratio of 13 times.

Its end markets are supported by record low interest rates, and ample lending availability. In addition, government incentives with stamp duty discounts are helping to support the housing market.

I believe Persimmon is an all-round quality share providing substantial passive income to investors. That said, any reversal of stamp duty incentives could limit house buying activity. With a cyclical recovery in progress, if inflation rises too far and too fast, interest rates are at risk of rising over the coming years.

All things considered, Persimmon has proved itself to be an industry leading business, and I’m happy to continue holding onto my shares.

Small company, large dividends

Passive income from UK shares isn’t just restricted to large FTSE 100 companies. Smaller companies can often provide greater potential for share price appreciation. One small company that I think could provide investors with growth and dividends is Somero Enterprises. It offers a near 10% dividend yield, solid balance sheet, and excellent returns.

As a manufacturer of specialist equipment for concrete flooring, it could benefit from a cyclical recovery too. Bear in mind though, it is a cyclical industrial company, and any economic downturn could negatively affect its shares.

Overall, its above-average dividend yield provides a safety cushion and I’d be happy to own the shares.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel owns shares in Persimmon. The Motley Fool UK has recommended Somero Enterprises, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Tesla building with tesla logo and two teslas in front
Investing Articles

The Tesla share price is up 48% since April, but down 19% this year! What’s going on?

Christopher Ruane considers some possible explanations for a sharp recent rise in the Tesla share price -- and a decline…

Read more »

piggy bank, searching with binoculars
Investing Articles

Here’s what forecasts say about the Aviva share price out to 2027

The Aviva share price has made a strong recovery in the past few years, and City experts predict more years…

Read more »

piggy bank, searching with binoculars
Investing Articles

If the stock market crashes, I will buy this under-the-radar AI stock

Nobody knows when the stock market will nosedive next. But one fantastic growth share is on this writer's buy list,…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£20k in an ISA? Here’s how it could be used to target £423 of passive income each month

Earning money from dividends in an ISA is one way to set up passive income streams. Our writer explains how…

Read more »

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

Will the easyJet share price return to its 2021 highs?

The long-term trajectory of the easyJet share price may have escaped some investors. The stock's really depressed, but can it…

Read more »

ISA Individual Savings Account
Investing Articles

Are these the best value Stocks and Shares ISA buys in the whole FTSE 100?

The stock market might be having a strong year in 2025, but I'm still seeing some great value Stocks and…

Read more »

Investing Articles

Is now the time to buy FTSE 100 shares instead of S&P 500 stocks?

The FTSE 100 has beaten 53% of S&P 500 shares over the last two years. Here's a top share I…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

This FTSE 250 stock hit 5-year highs today! Can it keep soaring?

This FTSE 250 stock's risen almost 40% since last summer. Can it keep up its impressive momentum? Royston Wild thinks…

Read more »