I’m always on the lookout for ideas that could boost my passive income streams. Some of my favourites involve investing in UK dividend stocks. Here are two I would consider buying at the moment.
Passive income ideas in financial services
Quite a few of what I see as the best ideas among UK dividend stocks at the moment involve financial services companies. One I would consider adding to my holdings for its dividend potential is investment manager M&G (LSE: MNG).
The company has one of the highest dividend yields of any FTSE 100 share, at 9%. It also has a relatively cheap valuation, with the price-to-earnings ratio sitting at just 5. That looks like excellent value to me. M&G has a well-established business with a strong brand. That can help to support customer retention.
One reason I’d consider investing in the company now is that in recent months, its stock has underperformed. That means I can get a higher yield buying now than if I’d bought M&G a few months ago. But one risk here is that increasing interest rates could lead to customers changing their investment objectives, which may hurt M&G revenues.
7% yielding telecoms giant
Another of the passive income ideas I’d consider at the moment for my portfolio is investing in Vodafone (LSE: VOD).
The well-known telecoms giant has a 7.1% yield at the moment. But it also has a balance sheet groaning with debt due to the high cost of constructing and operating telecoms networks. So, does the yield indicate that the City is pencilling in a possible dividend cut?
Vodafone has form in this regard, having slashed its dividend in 2019. I do see a risk that it could happen again. But I would still consider adding the company to my portfolio. Its strong brand and large entrenched customer base mean that it ought to be able to produce substantial profits for years to come. Last year, its operating profit was £5.4bn. With over £1bn of interest costs, the post-tax profit came in at £536m. That’s far lower, but is still a substantial amount. I think the strong operating profit shows the attractive underlying economics of the business. Debt servicing is set to be a substantial expense. But I reckon the company can manage that thanks to its strong cash flows without cutting the dividend, even though it remains a risk.
The 7% yield means Vodafone could be among the more impactful passive income ideas for my portfolio. I also see the prospect of a share price gain. The shares are up only 4% in the past 12 months, and are currently over 20% below their May price. That slide could continue — but at some point I think the market could re-evaluate Vodafone. Its £30bn market capitalisation looks cheap to me for a business of its scale.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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