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Looking to make a passive income? I’d buy these 2 cheap UK dividend shares in an ISA today

Peter Stephens
·3-min read

The passive income potential of UK dividend shares continues to be relatively high, even after the stock market crash. Many FTSE 100 and FTSE 250 shares offer impressive yields that could provide you with a growing income return.

With that in mind, here are two British shares that offer generous yields and the prospect of growing dividends. Buying them in a tax-efficient account, such as a Stocks and Shares ISA, could allow you to enjoy a rising income in the long run.

Improving passive income prospects

BAE Systems (LSE: BA) offers a relatively attractive passive income for investors. The aerospace and defence company’s half-year results were relatively positive. This allowed it to resume dividend payments after pausing them during the earlier part of 2020 in response to a rapidly-changing operating outlook.

The company currently has a yield of around 5%. Its dividend payouts are expected to be covered almost twice in the next financial year. This suggests its passive income is affordable and may be more robust than the payouts of some of its FTSE 100 index peers.

Looking ahead, BAE faces an uncertain set of operating conditions due to a challenging global economic outlook. However, its recent half-year results showed it has been able to deliver a resilient performance. As such, it therefore remains optimistic about delivering long-term growth.

The stock appears to offer good value for money. It currently trades on a price-to-earnings (P/E) ratio of 11.6. This suggests it can deliver capital growth alongside its passive income prospects. So now could be the right time to buy it within a diverse portfolio of UK shares.

A robust FTSE 100 investment opportunity

Severn Trent (LSE: SVT) also offers a relatively attractive passive income outlook. The utility company currently yields 4.1%, and is set to grow dividends per share by at least as much as inflation over the coming years.

This could make the stock an attractive option for income-seeking investors, as a loose monetary policy may encourage higher inflation over the medium term.

The company’s resilient financial performance despite a weak economic outlook may also make it a worthwhile defensive option for many investors. This could increase demand for its shares at a time when the economic outlook is uncertain. And that may have a positive impact on their price level.

Clearly, Severn Trent’s profit growth is unlikely to keep pace with many UK shares during the likely long-term economic recovery. Therefore, its capital returns may be more limited than those available elsewhere in the FTSE 100.

However, it could be a worthwhile investment for those seeking a relatively reliable passive income that grows in line with inflation. As such, now could be the right time to buy it in an ISA while it continues to offer a generous yield.

The post Looking to make a passive income? I’d buy these 2 cheap UK dividend shares in an ISA today appeared first on The Motley Fool UK.

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Peter Stephens owns shares of BAE Systems. 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