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How I’d find the best UK dividend shares to buy now for a passive income

Peter Stephens
·3-min read

The best UK dividend shares to buy now are likely to offer more than just a large passive income. They are also likely to have dividends that are amply covered by profit. That means they can maintain their shareholder payouts if the economic outlook deteriorates.

Furthermore, their dividend growth potential could make a significant impact on their appeal. Companies that can deliver a rise in dividends may appeal to a broader range of investors. And they could deliver impressive capital growth.

A large and robust passive income

At the moment, a number of UK dividend shares have high yields. This may tempt passive income investors to buy them based solely on their capacity to provide a generous income stream in the current year.

However, a high yield is of little use if it is not reliable during a challenging period for the economy. As such, ensuring that dividends are covered more than once by net profit could be a sound move. It could enable an investor to select the highest-yielding, and most reliable, dividend shares from across the FTSE 350.

Gauging the resilience of a passive income from any company can be achieved by dividing its net profit by dividend payouts. A figure of more than one means its earnings have covered dividends. However, given the prospects for the world economy, it may be a good idea to seek companies that have a higher level of dividend cover. They may be less likely to reduce their payouts should their profitability fall in the coming months.

Dividend growth opportunities

Companies that can offer rising dividends could produce capital growth, as well as an improving level of passive income. The loose monetary policy being followed by the Bank of England means dividend growth could become increasingly important to investors. This may add to inflation over the coming years, which could make companies that are able to raise dividends more popular among investors seeking to maintain their spending power.

Of course, identifying businesses capable of producing high dividend growth can be challenging. Their shareholder payouts are dependent on profit growth, which is difficult to predict at present. However, companies that are likely to benefit from industry-wide growth trends, or a recovery within their operating environments, could raise dividends relatively quickly. Similarly, stocks with modest dividend payout ratios may be able to afford growing shareholder payouts. That could be the case even if their profitability rises slowly.

It is possible to obtain a large passive income today (and the potential for growth in the long run) by assessing the dividend growth prospects of a stock before purchase. Although subjective, this process may lead to a more attractive stocks portfolio. That that could provide a stronger income stream in the coming years.

The post How I’d find the best UK dividend shares to buy now 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 2021