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The UK shares I’d buy to generate a passive income

Rupert Hargreaves
·3-min read
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I think it’s possible to generate a passive income with UK shares. Today, I’m going to take a look at a selection of the investments I’d buy to accomplish this aim.

Passive income

There are two qualities I think all income shares should have. These are an attractive level of dividend income and high dividend cover. There are a few companies that meet both of these criteria, but not as many as you’d think. Having both a high yield and high dividend cover is quite rare among UK shares.

However, Imperial Brands and British American Tobacco meet both of these standards. These FTSE 100 stocks offer a dividend yield of around 7%, and the payout is covered at least 1.5 times by earnings per share.

What’s more, according to my analysis, based on these companies’ cash generation, I think they can afford to increase their dividends steadily in the years ahead. That could be great news for passive income seekers.

Bank of Georgia is another option that has both qualities of a high yield and high dividend cover. After reducing the distribution in 2019 and 2020 due to coronavirus, analysts are forecasting a resumption in 2021. They’re predicting a dividend yield of 5.5%.

All current projections suggest dividend cover will sit in the region of 3.5. This is extremely impressive for a company that’s reported earnings growth of around 10% per annum for the past six years. For investors looking for a corporation that can provide both income and capital growth, it might be worth taking a closer look at the Bank of Georgia.

Hipgnosis Songs Fund is not your traditional company. This investment fund buys music royalty rights, which enables it to earn a passive income every time one of the tracks is streamed or purchased. Over the past few years, management has acquired a broad portfolio of rights, encompassing musicians from all genres. The resulting income is funding the group’s 4.1% dividend yield.

EPS cover the payout 2.8 times. So, it looks to me as if the business has plenty of funding to both increase the payout further and reinvest funds back into acquiring additional assets.

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Rising earnings

Trading UK shares can be a lucrative business. Plus500 has profited significantly this year due to increased trading levels in the pandemic. Management is now returning some of the additional capital earned to investors. City analysts are forecasting a dividend yield of at least 7% this year, falling to around 4.4% in 2021.

And that’s not all. In the past, Plus500 has redistributed excess capital to investors with share buybacks and special dividends. In fact, over the past five years, the stock has yielded an average of 12% per annum. Based on this track record, I think it’s worth considering the business for a passive income portfolio of UK shares.

Agriculture group Carr’s is my final pick. This business offers investors a dividend yield of around 4% with a dividend cover of 2.5. The company sells animal feed and feed blocks, among other things, which I reckon gives it a highly defensive nature. That could be a massive advantage for the business at a time when the economy is shrouded in uncertainty.

The post The UK shares I’d buy to generate a passive income appeared first on The Motley Fool UK.

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Rupert Hargreaves owns shares in Imperial Brands and British American Tobacco. The Motley Fool UK has recommended Imperial Brands. 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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