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Many UK shares are excellent choices for investors seeking regular dividend income. The FTSE 100 has a higher dividend yield than most global indexes. What’s more, individual shares listed on the blue-chip benchmark can provide higher yields than the Footsie average.
Here are seven stocks I’d consider buying for their passive income potential.
‘Sin’ stocks aren’t for everyone. Many investors avoid investing in industries that raise difficult moral questions. However, with strict regulations in place to assuage my concerns, I think tobacco companies are among the best dividend stocks investors can buy.
I already own British American Tobacco shares. The company has major global brands in its portfolio, including Lucky Strike, Pall Mall, and Rothmans. Another tobacco giant I’m considering is Imperial Brands, which owns Winston, Golden Virginia, and Rizla rolling papers. They’re both dividend heavyweights, offering 6.99% and 6.94% yields respectively.
Tobacco shares are good picks when inflation is high due to their strong pricing power and large cash flows. Admittedly, possible government intervention is a big risk these stocks face given the public health incentives to reduce or eliminate smoking.
However, with new lines of non-combustible products, these businesses are reinventing themselves to counter this threat.
The Bank of England just raised the base rate to 4%. As interest rates climb, banking stocks often outperform due to the beneficial effect this has on their net interest rate margins. They also provide market-leading dividends.
I’m already a Lloyds shareholder. The black horse bank sports a 4.03% annual yield. But I also think other FTSE 100 banks are good value investments currently. Barclays and HSBC yield 3.33% and 3.64% respectively.
The price-to-earnings (P/E) ratios of these stocks are fairly low. Lloyds’ P/E ratio is 8.74 — for Barclays it’s 6.13, and for HSBC it’s 12.19. At these multiples, I hope I could secure good returns from today’s share price levels.
The banking sector faces downside risks from a housing market slump, which could hit their mortgage books. However, I believe these concerns have largely been priced in and the shares look cheap to me at present.
Finally, I think the telecoms sector can also provide good dividend returns. For emerging markets exposure, I’d consider investing in Airtel Africa, which yields 3.95%. Another company making progress on the African continent is Vodafone. This stock yields 8.34%.
Airtel Africa recently confirmed double-digit revenue and EBITDA growth for the nine-month period ending 31 December, as well as a 10.1% increase in its customer base to 138.5m, driven by soaring demand for its mobile data and money services. Similarly, Vodafone posted 4.8% revenue growth in Africa for Q2 2023.
Both companies face pressure from competition as consumers shop around in the cost-of-living crisis. In addition, Vodafone has concerning debt levels. These factors could weigh on the share prices, but I view the big dividend yields as reasonable compensation for the risks.
Building a second income from UK shares
If I secured a 5% yield on my UK shares and filled a Stocks and Shares ISA with my £20,000 tax-free allowance, I’d make £1,000 in passive income per year.
That’s a great starting point for me to earn a second income from the stock market.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.