Given the uncertainty in the UK economy at the moment, I’m keen to invest in companies that I feel comfortable about for the long term. There are some firms that have shown resilience during past downturns, having the finances to continue to pay out dividends during tough times. So when I’m trying to find the best UK shares for passive income, these are on my list.
Historically sustainable income
Past performance doesn’t guarantee future returns. I know that disclaimer is completely true, but when looking for sustainable dividend options, the past performance does help me — to some degree — to gauge future prospects.
For example, Unilever and Sage Group both have over 20 years of consecutive dividend growth. If I invested a chunk of cash equally between the two, I’d have an average dividend yield of 3.23%. This is slightly below the FTSE 100 average, but I’m still considering investing here.
The main reason is that during recessions in the past, both companies have paid reliable income. I’d rather have a high probability of getting paid something during a downturn rather than a stock that currently has a better yield but has a history of cutting it.
Defensive gems with high yields
Two other UK shares I like at the moment are J Sainsbury and Tesco. The current yields are 6.09% and 4.19%, respectively. Both of the UK supermarkets in the mid-range for the sector. The brands aren’t as high-end as Waitrose and Ocado, but also aren’t as budget as Aldi.
I think both are great defensive buys for whatever might happen over the next year. The supermarkets contain many goods that are necessities for everyday living. So demand should remain solid from consumers. Demand might fall for the likes of Waitrose due to cost-conscious shopping, but I think the mid-range should stay buoyant.
As a risk, the sector operates on razor-thin single-digit profit margins. As a result, any large swing in costs can easily flip the business from a profit to a loss.
A UK share to hedge my risk
Finally, I think I’ll add in Rio Tinto. This is actually a hedge against the other four stocks above. If I’m wrong about a potential downturn later this year, I want something that could outperform during a stock market recovery.
A positive stock market is usually good for businesses like this. It should help Rio Tinto to reap the benefits of higher iron ore and aluminum prices. In turn, higher profits should support the dividend payout.
The dividend yield is already at a generous 13.85%. So in theory, if the share price holds at this level and the dividend per share even remains the same, I can look forward to a high level of passive income.
I admit that it’s a risky stock to pick now. If we see a recession then the business will struggle. However, that’s why I’ve diversified my income portfolio with a total of five stocks instead of just one.
