Investing in UK dividend shares can be a lucrative source of passive income. Buying a range of such shares means that, even if one company unexpectedly cuts its dividend, hopefully I will still receive income from other holdings.
With £10,000 to invest, I would split it evenly across these five shares to target a yield of over 8%.
Risks and rewards
Will the housing market collapse? Will cigarette smoking keep falling? Those sorts of worries plague investors in companies such as housebuilder Persimmon and tobacco company Imperial Brands.
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I think the worries are justified and they do pose a risk to future profits. But I also think that risk is built into the companies’ share prices already, as reflected in their high dividend yields. Persimmon, for example, is yielding 9.7% and Imperial offers 8%. Both companies are in the FTSE 100 and their yields are far above the average offered by their peers in the index.
There is a lot I like about the companies. Persimmon is a recognised name among homebuyers and has a disciplined financial model with high profit margins. Its most recent full-year results showed a net profit margin of 19%. Imperial is also a high margin business, thanks to the low manufacturing costs of cigarettes and pricing power offered by its portfolio of premium brands.
Financial services
I would also invest in two high-yielding companies that operate in different parts of the financial services sector.
First is asset manager M&G, currently offering a dividend yield of 8.4%. The company is well-established and has a sizeable client base. With assets under management and administration of £370bn, M&G is a huge business. That scale can help it make big profits, both now and in future. One concern I have is investors leaving its retail asset management arm over recent years. If that continues, profits could fall. But ongoing strength in M&G’s institutional business is a source of confidence.
I would also invest in insurer Direct Line. The insurance business model is fairly simple and Direct Line stays away from the sorts of exotic risks that can throw up sudden unexpected losses on a big scale. Events like the recent storms could still hurt profitability in any given year. But over the long term I think the company’s brand and underwriting expertise should help it attract and retain profitable business. With a dividend yield of 7.4%, I would tuck Direct Line in my income portfolio and hold it there.
High-yield trust
Lastly, I would put £2,000 into Income & Growth Venture Capital Trust. As the name suggests, it seeks to generate both income and capital growth by investing in a large portfolio of early stage companies. Most such companies are unlisted, but I can get exposure to them by buying Income & Growth shares. Some companies may fail, which could hurt the trust’s profits, but hopefully it will also pick some real winners.
The dividends tend to move around a lot, but the current yield is an attractive 9.6%.
UK dividend shares with average 8.6% yield
With an average yield of 8.6%, splitting my £10,000 evenly across these five shares would hopefully give me annual passive income of £862. I regard this portfolio as an attractive way to boost my passive income streams.
