Some passive income ideas are more straightforward than others. One of the reasons I like UK dividend shares for passive income is their simplicity. Putting money into a share, I can just sit back, do nothing, and wait, hoping that passive income will start to flow.
British American Tobacco
One of my favourite passive income ideas that I use in my own portfolio is owning shares of British American Tobacco (LSE: BATS). The company behind famous brands such as Lucky Strikes is a cash generation machine. Cigarettes are cheap to make but can be sold at a premium price. That helps explain the £9.8bn of net cash the company generated from its operating activities last year.
BATS has substantial net debt – around £40bn when it last reported. So some of that cash generation is used for interest payments. Even after that, the strong cash flows allow for generous dividends. Last year the company paid out a mammoth £4.7bn to shareholders in the form of dividends. With a 10-year compound annual growth rate of 7% and annual increases for over two decades, the BATS dividend is highly attractive to me.
On top of that, the company’s share price means that currently the yield is around 7.8%. That means that if I put £1,000 into the shares today, that investment alone would hopefully give me £78 of passive income next year.
But dividends are never guaranteed and there are risks to the BATS dividend. For example, mounting regulation could impose additional costs, eating into profit margins. Declining rates of cigarette purchase in key markets could lead to falling revenues.
ExxonMobil
Another of the passive income ideas I use in my portfolio is ExxonMobil (NYSE: XOM). The US-based energy company is an oil and gas giant. While there is a risk that shifting energy demands cuts revenues, personally I reckon oil and gas could remain profitable for decades to come. A growing global population and lack of cost-effective substitutes in many cases should keep oil demand high for a long time.
Exxon has energy expertise that might allow it to benefit from an increase in alternative energy sources too. That could boost revenues and profits, although in the coming years I see it as insignificant compared to the main profit drivers of oil and gas. Last year saw many companies including Exxon cut back heavily on capital expenditure. That could lead to lower oil availability several years down the line. That could help support pricing.
Exxon yields around over 5%. As well as the risk of declining demand and oil price falls, there is an exchange rate risk. As the shares pay out in US dollars, currency shifts could affect how much I earn in passive income from my Exxon position.
Two simple passive income ideas
If I put £5 a day away, after a year I would have over £1,800 saved up. I could split that between BATS and Exxon. At the current yield, that would give me a projected passive income stream of around £120 per year in future. Both companies have a history of dividend growth so my passive income could increase in years to come, although that is not guaranteed.
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Christopher Ruane owns shares in British American Tobacco and ExxonMobil Corp. 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.
