If I had a spare £300 right now, I could decide not to invest it. My thinking might be that it hardly seems worthwhile. After all, with £300, how much income could I really hope to generate through UK dividend shares once I pay dealing charges?
The answer, in my opinion, is hopefully enough to make it worth my time. In fact if I had £300 to invest right now, I would split it between two UK dividend shares.
British American Tobacco
Tobacco shares can make good passive income ideas because they often pay hefty dividends. Tobacco is a highly cash generative industry. Manufacturing costs are low and there is often little requirement to spend money developing new business areas.
That has changed a bit in recent years. The risk of declining cigarette sales causing revenues and profits to fall has led British American Tobacco (LSE: BATS) to invest heavily in next-generation products. That has been costly so far as it takes money to build new brands. But non-cigarette revenue at the company jumped 42% last year to £2bn. Meanwhile, price increases helped the company grow its cigarette revenues by 4%, excluding the impact of exchange rates.
For a global company like BAT, exchange rate swings are a real threat to revenues and profits. Swings in consumer habits are clearly another risk, even though, so far, the company is tackling them head on. But for now, the financial performance remains impressive. It has increased its annual dividend yet again and currently yields 6.3%.
Legal & General
My second choice among UK dividend shares to buy for my portfolio would be financial services group Legal & General (LSE: LNG).
The insurer famed for its multi-coloured umbrella logo currently yields 6.5%. Not only that, but it has proven itself to be a solid dividend payer in the long run. Early in the pandemic, when rivals like Aviva cancelled their dividends, Legal & General kept paying. It has set out plans to keep increasing its dividend in the coming years, although (as with any company) that is never guaranteed to happen. With its large customer base and brand recognition, I continue to see Legal & General as an appealing UK dividend share for my portfolio.
New rules on renewal pricing in UK insurance might hurt profits. But they could also lead to a less complicated system of insurance pricing. Ultimately, that might actually help the profitability of firms like Legal & General.
I would buy and hold these UK dividend shares
Putting £150 into each of these UK dividend shares today would give me a prospective annual passive income of around £19. That is not a huge amount. But instead of squandering £300 on a big night out or a pair of overpriced shoes, putting it to work and hopefully setting up annual passive income streams of £19 from it seems like an appealing move to me.
Both companies have strong business prospects. Over time, I would actually hope to see the dividends I get from them grow. That is a hope not a certainty, though – and it certainly will not happen if I do not buy the shares in the first place!
Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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