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3 reasons why I’d invest money right now in UK dividend shares for a passive income

Peter Stephens
·3-min read

Investing money in UK dividend shares for a passive income may seem unappealing after the stock market crash. After all, indexes such as the FTSE 100 and FTSE 250 are trading significantly lower than they were at the start of the year.

However, British shares offer higher passive income returns than many other mainstream assets. Furthermore, they have dividend growth potential, as well as the prospect of capital appreciation over the long run.

As such, they could offer a relatively attractive means of building a growing income over the coming years.

High passive income from UK dividend shares

Many UK dividend shares offer attractive passive incomes at the present time. As mentioned, the stock market crash has caused FTSE 100 and FTSE 250 shares to trade at low prices. The companies that have maintained their dividend payouts now offer high yields in many cases relative to other mainstream assets.

In fact, a relatively large number of blue-chip shares have dividend yields in excess of 5% at the present time. The FTSE 100 itself has a dividend yield of around 4.7% after its fall since the start of the year. By contrast, the yields on buy-to-let property have been squeezed by rising house prices and lagging rental growth in some areas. Meanwhile, the returns on cash and bonds are at historic lows in many cases. Therefore, a portfolio of UK dividend shares could produce a far more appealing passive income in the coming years.

Dividend growth opportunities

As well as high yields today, UK dividend shares could offer inflation-beating passive income growth over the long run. The current economic outlook is unlikely to persist over the coming years. Vast amounts of fiscal and monetary policy stimulus could impact positively on the operating conditions for many businesses. This may lift their financial performances and allow them to pay a higher amount of income to shareholders.

Certainly, dividend growth may be somewhat slow in the near term. Companies may be reluctant to pay larger dividends while the economic and political outlook continues to be uncertain. However, a long-term horizon could mean that passive income investors benefit from a faster pace of growth compared to other mainstream assets. This may add to the appeal of UK dividend shares at the present time.

Capital growth potential from UK shares

The prices of UK dividend shares may have fallen heavily this year in some cases. But, over the long run, they could deliver impressive capital returns. The track records of indexes such as the FTSE 100 and FTSE 250 show that they’ve generally produced annual total returns in the high single-digits.

As such, buying a diverse range of income stocks could offer much more than just a generous passive income compared to other mainstream assets.

The post 3 reasons why I’d invest money right now in UK dividend shares for a passive income appeared first on The Motley Fool UK.

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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