Who doesn’t like the idea of getting paid to do nothing? I’m always exploring ways to generate passive income and I think high-quality UK stocks could be the answer.
With many years ahead of me until retirement, I’ve started thinking about supplementing my salary with other forms of income. One of those that has piqued my interest is a steady stream of dividends for the years ahead.
If I’m going to aim for £10,000 per year in passive income, I want it to be from reliable dividend payers (or at least historically so) that are in non-cyclical industries able to hopefully weather market cycles.
One large-cap stock that ticks the box
I’ve been honing in on the larger end of the market. I like FTSE 100 stocks that are industry leaders and have strong track records of delivering a solid dividend yield to investors. The Footsie itself has a 3.7% annual yield, so ideally I’d like to receive higher than that.
One name in particular that caught my eye is National Grid (LSE:NG). It is one of the world’s largest publicly listed utilities, focused on transmission and distribution of electricity and gas.
I like the generally stable and defensive profile of utilities companies. There is usually strong demand for electricity and gas despite the ebbs and flows of the economy.
Granted, there are some medium and long-term challenges from the energy transition business, but I think large entities like National Grid are well-positioned to pivot as required.
National Grid as a passive income prospect
Shares in the utilities group fell in May on the back of its full-year results. The company announced a 7-for-24 rights issue that did take investors by surprise.
That rights issue will impact the company’s current 6.2% dividend yield with the dividend payments spread across a higher number of shares. However, the predicted yield is still forecast to be around 5.7% per year.
However, my investment horizon for a potential passive income play is looking forward at least five years, so I’m not as concerned by near-term volatility.
Based on that estimated 5.7% yield, I can work out how much I would need to invest to make £10,000 per year in passive income.
That magic figure is £175,439 invested. Based on the current National Grid share price of 918p, that equates to 19,111 shares.
Potential pitfalls
While all of this sounds great in theory, there are clearly risks involved. For one thing, dividends are discretionary. Boards tend to be reluctant to reduce them, but it does happen.
More specifically for National Grid, I am looking at their debt burden. The company has £43bn of debt on its balance sheet as it continues to invest in future growth.
However, the higher interest rate environment is certainly a factor when it comes to cash flow. The more cash that is needed to service large debt balances, the less that is available as free cash flow for shareholders.
One for the future
I am interested in building a diversified portfolio that can deliver my target passive income. National Grid is just one of many dividend shares that could help me do that.
While I don’t have the money to invest just now, it’s certainly on my radar as I work towards that £10,000 figure.
This post was originally published on Motley Fool
