Some of my favorite passive income ideas are UK dividend stocks. I love the hefty dividends and the fact that I don’t have to work for income. Here are five that I would consider buying now for my wallet in an attempt to increase my passive income stream.
The insurer and the financial services company Direct line (LSE: DLG) has built an iconic brand. Even in an age when many customers buy insurance online rather than over the phone, the red phone logo and brand identity are helping to increase customer awareness and loyalty.
It is good for the business of the company as it can help reduce the cost of acquiring customers. It can also help reduce the customer churn rate. Both of these can be beneficial for Direct Line’s profits, which last year amounted to £ 367million after tax. Profits help fund dividends and this is where I think things get interesting with Direct Line from a passive income perspective. With a yield of around 8% lately, the company has offered one of the most attractive payouts on the market. FTSE 100.
All actions involve risk and this is also true for Direct Line. The rise in the price of used vehicles makes it more expensive to settle certain claims. This could lead to lower profits. But I would gladly consider Direct Line for my portfolio.
Another of the biggest dividends of the FTSE 100 comes from Imperial marks (LSE: IMB). As its old name Imperial Tobacco suggests, the Bristol-based company has a global tobacco empire. It owns brands including Winston, Where is, and John Special Player. Tobacco companies are able to generate high free cash flow and can fund large dividends. Even after falling sharply last year, the Imperial yield has hovered around 9% recently.
This may in part reflect an obvious risk that tobacco companies like Imperial face. A decline in the number of smokers in many markets threatens both incomes and profits. The Imperial faces it. But its strategy of trying to increase market share in certain countries could be risky. The Imperial may just get a more comfortable seat on an always sinking boat. Then again, perhaps cigarettes and cigars will last for decades. During this time Imperial may be able to increase its volumes. It also has pricing power and can therefore partly mitigate the decline in smoking rates by increasing prices.
While there are obvious risks here, Imperial’s performance is attractive to me. I keep it in my wallet because of the passive income stream it provides.
I bought Diversified energy (LSE: DEC) for the first time this year. With its extensive network of oil and gas wells, the company has pumped money out of the ground – and shares much of it with its shareholders in the form of dividends. The yield has been in double digits recently, making it one of the most lucrative passive income ideas I have.
On top of that, Diversified has increased its dividend over the past few years. He also pays quarterly. Both can be interesting when considering passive income, although past dividends are no guarantee of future dividends.
There are also risks here. When the wells reach the end of their life, they must be plugged. It costs money. With Diversified operating approximately 67,000 wells, over time these cap costs could add to a significant amount. This can hurt the profits of the business. Energy prices can also be volatile, as we have seen in 2021. This could cause profits to decline in the future as well.
The telecom operator Vodafone (LSE: VOD) has an extensive network in many markets. In the UK alone, it has over 18 million customers and is just one of the company’s markets. He has spent decades forging a leading position in European telecommunications and this has led to a large and profitable business.
This profitability allows the company to reward shareholders with dividends. With the payout recently being north of 6% of the Vodafone share price, I find this attractive. The company is one of the passive income ideas I would consider buying for my wallet right now.
One concern I have, however, is the capital intensive nature of the business. Tendering for licenses, construction and maintenance of networks can be very expensive. Not only could this reduce profits in the future, it also caused Vodafone to incur substantial debt. A service that could threaten the dividend, which the company already cut several years ago.
In this context, Vodafone continues to generate huge cash flow. I think he can do so far in the future. New technologies such as 5G can increase its ability to make profits as users sign up for more services.
To help reduce my risk, I try to diversify my portfolio across different business areas.
When it comes to the pharmaceutical industry, one of the companies that I would consider buying for my portfolio is GlaxoSmithKline (LSE: GSK). Offering around 5% yield lately, I think the company could be a handy addition to my passive income stream.
2022 could be transformative for GSK. It plans to split into two companies. The combined dividend yield may be lower than that of current GSK. However, I think the strategy could help the company to focus more on two distinct areas, pharmaceuticals and consumer goods. In the long run, if it releases more value than the current structure, I think the move might actually be good for the dividend.
But there is a risk that the breach could distract management’s attention and result in additional costs such as professional fees. This could lead to lower profits.
Christopher Ruane owns shares in Diversified Energy and Imperial Brands. The Motley Fool UK recommended GlaxoSmithKline and Imperial Brands. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.