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2 dirt-cheap UK shares I’d buy in an ISA today to start earning a passive income

Peter Stephens
·3-min read
Various denominations of notes in a pile
Various denominations of notes in a pile

Buying dirt-cheap UK shares to make a passive income could become increasingly popular for ISA investors. Many FTSE 100 and FTSE 250 stocks currently have significantly higher dividend yields than the income returns available on assets such as cash and bonds. They may also offer dividend growth potential over the long run that further increases their appeal on a relative basis.

With that in mind, here are two UK shares that appear to offer impressive income prospects. They could increase the income return within an ISA over the coming years.

A robust passive income from a defensive FTSE 100 share

National Grid (LSE: NG) has been a popular FTSE 100 stock among passive income investors in the past. The utility company’s defensive business model has meant that it has offered greater resilience and stability than many UK shares. This may make it increasingly popular at a time when the prospects for the economy are relatively uncertain.

National Grid’s recent results showed that it remains on track to meet financial guidance for the full year. It expects to deliver annual asset growth in the mid-single-digits, which should mean that it is able to meet its goal of increasing dividends at a similar pace to inflation over the medium term. This aim may become more attractive should higher inflation be the end result of major monetary policy stimulus.

The company’s 5% dividend yield is relatively high compared to other FTSE 100 shares. Therefore, it could offer a worthwhile passive income, while having a more resilient dividend growth outlook than other UK shares. As such, it could be a relatively attractive income share while the UK’s economic outlook is challenging.

Income plus capital return prospects relative to UK shares

Rio Tinto (LSE: RIO) offers a less certain passive income than other UK shares. Its business model is reliant on the performance of the world economy, with the level of demand for commodities having a significant impact upon its bottom line.

However, the company’s recent updates have highlighted its improving financial strength. It is on target to deliver production that is in line with its guidance for the full year, with all of its assets having remained operational in the first half of the year. This allowed it to raise dividends per share by 3%. It has a dividend yield of almost 7%, which is over two percentage points higher than the FTSE 100’s dividend yield.

Clearly, the uncertain nature of Rio Tinto’s business model means there are less risky options within the FTSE 100 to produce a passive income. However, its high yield and the strength of its asset base suggest that it could offer an attractive risk/reward opportunity over the long run within a diverse ISA portfolio of UK shares.

The post 2 dirt-cheap UK shares I’d buy in an ISA today to start earning a passive income appeared first on The Motley Fool UK.

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Peter Stephens owns shares of Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2020