Most investors are always on the hunt for good UK shares with dividend potential. Over time, adding these together forms the foundation of a strong portfolio that can generate passive income. Here are some examples of stocks that could be considered right now.
The big picture
I like to use a top-down approach to picking the companies. What this means is that I look at the big picture first, then work my way down to individual stocks. For this strategy, there are two high-level considerations. One is that the portfolio’s yield needs to be high enough to generate a substantial monthly income. The second is that they need to be from sectors I’m optimistic about.
For the yield element, it’s partly based on the financial goal. Let’s say an investor wants to target £750 in monthly income, and can afford to allocate £500 a month. This means that the portfolio would need to target a yield in excess of the FTSE 100 average of 2.89%, otherwise it would take many decades!
A sweet spot could be in the 6%-8% dividend yield range. If we assume a 7% average yield and £500 a month, then during year 13 the portfolio would be large enough to pay out £750 a month. Of course, this isn’t guaranteed, as dividends can change over time. But it helps to show it’s achievable and the rough time frame.
Specific shares
The second top-down element is filtering for sectors. I’m optimistic about healthcare, energy, and financial services over the coming decade. Within these areas, I then look for companies with the relevant target yield. Fortunately, there are plenty that can be used to build a portfolio around, such as Legal & General (7.8%), BioPharma Credit (7.23%), and Harbour Energy (8.9%).
One to delve into further is Ashmore Group (LSE:ASHM). The stock is up 49% in the past year, but it still boasts a divdiend yield of 6.99%. It’s a specialist investment manager focusing on emerging markets. This area has started to get super hot, with it doing very well out of South American bonds in recent months.
The advantage it has over more traditional money managers is the specialist knowledge of these underdeveloped markets. In some ways, it can be easier to provide value and profitable ideas from these markets versus a very developed market like the UK, where everyone is analysing the same stocks!
Interim results from earlier in February showed a 10% rise in assets under management (AUM) for the half-year. This is good as revenue is linked to AUM, as more money being managed means more fees that can be charged. The revenue boost should ultimately translate into profits, which support future dividends.
In terms of risks, emerging market assets are known to be volatile. The risk needs to be carefully managed, otherwise the business could suffer quickly.
Overall, I think Ashmore could be considered by investors, along with the other related stocks, as part of an income portfolio.
