I’m searching for cheap UK shares that can generate a passive income. 2022 has been brutal for many investors, including me. However, this could be a blessing in disguise when it comes to dividend-paying stocks. That’s because as stock prices fall, dividend yields typically rise. Huge declines in some dividend-paying stocks may present an incredible opportunity to supercharge my savings. Here’s how I’d go about it.
Dividend Aristocrats
Importantly, dividend payments are never guaranteed. They can be more or less than the amount distributed in previous years. Therefore, I’m searching for a company with strong business fundamentals that can weather economic storms. Dividend Aristocrats are a good place to start. These are usually companies that boast an economic moat or a comparative advantage. Additionally they typically have low debt and high profitability. Such characteristics allow them to consistently pay and increase dividend payouts to shareholders over many years.
One Dividend Aristocrat I’d buy today is Legal & General (LSE: LGEN). It’s a provider of insurance, savings and investment products. The demand for this tends to be robust in all stages of the economic cycle. Indeed, it has prospered within a competitive industry with a large customer base for decades.
It has been a tumultuous couple of weeks for Legal & General. Amid market volatility, the company felt the need to reassure investors. Specifically, it stated that it had not been a forced seller of bonds or UK government debt, known as gilts. Even so, the share price tumbled and at the time of writing, the stock is down 25% for the year. That’s good news for me though on my search for passive income. It now yields a very attractive and well covered 8.2% dividend.
What’s more, the stock trades at a forward price-to-earnings ratio of 6.3. It’s a quality business and it frankly looks like a good all-round value stock for my portfolio.
Passive income in 2023 and beyond
If I do buy Legal & General shares, let’s take a look at how it can earn me a target of, say, £500 in passive income next year. Each share will currently cost me 226.85p. Therefore, 2,695 shares would set me back just shy of £6,115. Assuming no cuts to its dividend, that lump sum should generate £500 in dividends in 2023. Tasty!
Unfortunately, I don’t currently have enough cash on hand to invest that lump sum today. However, I could still start building towards my savings goals. For example, I could invest £510 a month to save £6,115 in one year. Through regular monthly investments in strong, dividend-paying businesses like Legal & General, I can gradually build a portfolio that generates sustainable passive income. I tend to make investments at the beginning of each month and Legal & General is definitely on my to-buy list for November.
