Generating passive income from UK dividend stocks is a good investing goal. I aim to do this by holding a mix of different stocks that pay out dividends at different times of the year. If I had some additional free cash right now to add to my portfolio, here are two companies that I’d be interested in.
A super supermarket
J Sainsbury (LSE:SBRY) is a ‘Big Four’ UK supermarket. As far as historical market share goes, it typically ranked as the second or third largest supermarket over the past few years. Tesco holds a strong leadership position around 27%, with Sainsbury’s and Asda vying for the next two spots on an average share around 15% each.
As far as its position as a UK dividend stock goes, Sainsbury’s has a track record of paying out income. Over the past decade, the dividend yield has averaged around the 4.5% level. Currently the yield is 4.18%, above the FTSE 100 average.
I think that the outlook for the company is strong, and should support the continuation of the dividend being paid. Underlying profit before tax for the 2020/21 fiscal year was down 39%. However, most of this drag was due to Covid-19-related costs, totalling around £485m. This was a lot, but mainly comprised one-off costs, so I’m not concerned for the future about this.
Strong growth was seen in online orders, up 102%. As a result, this helped generate free cash flow of £784m, enabling the payment of the dividend.
One risk with this UK dividend stock is its slim profit margins. Should key suppliers see higher costs due to Brexit or the pandemic, then Sainsbury’s could see its profitability under threat.
UK dividend stock ahoy
A second UK dividend stock I’d look to buy is Admiral Group (LSE:ADM). The insurance company has a strong presence in the UK, mainly focusing on the car and home insurance space.
It ticks the box for a UK dividend stock as its policy aims to pay out 65% of profits to investors. This should allow the company to always pay some form of dividend, as long as it makes a profit.
I think that profitability is not going to be an issue for Admiral going forward. The business model (of receiving insurance premiums) has been proven over time. Even during the global pandemic, financial performance wasn’t hampered. In fact, turnover modestly grew by 2% last year, with profit before tax up 21%.
Naturally, with fewer people driving, claims were lower in 2020 which helped boost profits. So one risk here is that as we return to some kind of normality, Admiral could see costs increase as more insurance claims (and payouts) arise. I’m also not a huge fan of the personal loans side of the business, given the risks in this space.
Overall, a dividend yield of 3.76% is healthy for a UK dividend stock, so I would look to buy Admiral on its merits.
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Jonathansmith1 does not hold shares in any stock mentioned. The Motley Fool UK has recommended Admiral Group. 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 2021