Buy-to-let property investments have been a popular choice in recent decades. Possibly more popular than UK shares. Average property prices in the UK have risen by 177% over the past 20 years. Prices have been supported by ample availability of mortgages, decreasing interest rates, and an imbalance in supply and demand of housing.
Furthermore, tax treatment for buy-to-let investments has historically been favourable – but not anymore. In recent years, the tax rules have changed, making buy-to-let investing considerably less appealing.
I’d consider investing in a basket of cheap UK shares instead. It can be done tax-free via a Stocks and Shares ISA. Currently, UK investors can shelter up to £20,000 per year, free from capital gains and dividend taxes. Not only can one invest in UK shares, but also in international shares, managed funds, investment trusts, and exchange-traded funds.
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Which UK shares to buy for a passive income?
There are almost 2,000 UK shares in the London Stock Exchange to choose from. There are dozens of good quality companies that I would consider for a passive income. One of these is CMC Markets (LSE: CMCX). This is a UK-based company that provides online and mobile trading services.
It recently provided an update where it highlighted strong performance in its first half. It experienced strong trading performance across all areas of the business. In addition, Covid-19-related stock market volatility increased its client activity.
There is much to like about this company. Client numbers, revenues, and profits are all growing. It offers a good hedge against future market volatility that might arise. Further Covid-19 related disruptions, Brexit news flow, and the US election are all potential areas of volatility.
In addition, it offers a generous dividend of nearly 5% per year. This is great for investors looking for a passive income. I like UK shares that provide a dividend in addition to growing earnings. In particular, companies that can provide sustainable dividends, rather than providing a dividend one year and cancelling it in the next.
So that management are aligned with shareholders, I like UK shares where the CEO owns a decent chunk of shares in the company. CMC Markets holds up well in this regard. Founder and CEO Peter Cruddas owns almost 60% of the shares in CMC Markets.
Put the kettle on
Another cheap UK share that pays a dividend is Strix (LSE: KETL). Paying out around 3.5% of dividends per year, I’d say it’s a decent option for passive income.
Strix is the world’s number one manufacturer of kettle safety controls. Almost 90% of its business is in this space. It holds a dominant position in this niche but is branching out to diversify into other business areas. Strix is aiming to deliver 14 new products this year.
I’d say that Strix is a good quality UK share that is financially sound, cash generative, and offers good growth prospects. With the share price trading 16% off its recent high, and an undemanding price-to-earnings ratio of 16 times, I’ll definitely consider adding it to my portfolio soon.
