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I’d buy these 5 UK shares now to start earning passive income in the stock market recovery

Peter Stephens
·3-min read
Hand holding pound notes
Hand holding pound notes

While many UK shares have reduced their dividends in 2020, it’s still possible to build a diverse portfolio to make a worthwhile passive income.

Furthermore, many stocks could experience improving operating conditions and rising valuations in a likely stock market recovery following the 2020 market crash.

As such, buying stocks today could provide a generous income return and capital gains in the coming years. Here are five FTSE 100 stocks that could be worth buying as part of a portfolio containing a broad range of UK shares.

Opportunities to make a passive income

With continued economic and political uncertainty likely in 2021, defensive shares such as SSE and National Grid could offer a robust passive income. The utility companies have long track records of paying dividends relatively uncorrelated to the economic outlook.

They’ve also generally raised shareholder payouts at a pace that is equal to, or above, inflation. Their dividend yields of around 6% are also higher than the FTSE 100’s sub-4% yield following the recent stock market recovery.

Meanwhile, BHP and BP are arguably at the other end of the income spectrum from a risk perspective. The two companies are very dependent on commodity prices. That means their financial performance could be impacted significantly by an improvement, or deterioration, in the global economic outlook.

BP’s strategy to become greener may improve its financial performance in the long run. Meanwhile, BHP’s diverse asset base and solid balance sheet may reduce its overall risks for passive income investors. The 6%+ yields on offer from both companies also suggest their potential rewards are worth their short-term risks.

Unilever also offers a relatively generous passive income return over the long run. Although the consumer goods company yields 3.5% at present, which is roughly in line with the FTSE 100’s yield, it appears to have strong growth prospects. Its wide range of brands mean customer loyalty is high. Meanwhile, an increasing focus on social and environmental concerns may help the business to remain relevant.

Building an income portfolio for the stock market recovery

Clearly, making a passive income from UK shares is likely to mean additional risk versus other asset classes. Threats to their performance, such as political instability and a weak economic outlook, may persist in the coming months. However, the high income returns and dividend growth potential on offer within the FTSE 350 means that the risk/reward opportunity is likely to be deemed favourable by many investors.

As such, now could be the right time to build a diverse portfolio of dividend shares. Over time, they could produce a resilient and growing income return that improves an investor’s financial situation. By owning a wide range of companies that operate in different sectors, it’s possible to limit risk and improve long-term returns in a likely stock market recovery.

The post I’d buy these 5 UK shares now to start earning passive income in the stock market recovery appeared first on The Motley Fool UK.

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Peter Stephens owns shares of BHP Group, BP, SSE, and Unilever. The Motley Fool UK has recommended Unilever. 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.

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