Some of my favourite passive income ideas are UK dividend shares. I like the automatic dividends and the fact that I don’t need to use up time or energy to get the income. Here are three stocks I would consider buying now.

High-yielding share

As I recently pointed out, mining giant Rio Tinto (LSE: RIO) is a FTSE 100 share with a dividend yield of over 6%. When I’ve filtered for quality dividends, it comes up alongside only three other investments based on my criteria. For background, my criteria were: dividend cover of more than 1.5 times; five-year EPS compound annual growth rate (CAGR) of more than 15%; return on capital employed (ROCE) of more than 10%, dividend per share CAGR of more than 9% and a price-to-earnings (P/E) ratio of 0.8 or under.

The fact that Rio Tinto came up after this screening, could indicate it’s a passive income share worth adding to my portfolio. It could do well if iron ore prices recover, which is a significant part of its income.

On the flip side more money going into ESG investing, (investments with solid environmental, social and governance records), could hold back the share prices of miners. The price of iron ore is also beyond its control and could continue to fall, this would very likely hit the share price. 

Two dividend growth shares

When it comes to passive income I also want to see very sustainable dividends. There are two dividends I think have room to grow for many years to come because there’s a high level of dividend cover, reasonable dividend growth and a business model that should support earnings growth. They come from Sureserve (LSE: SUR) and GB Group (LSE: GBG).

The former is a property services group. It should benefit from the growth of smart meters and the drive to make buildings greener.

Dividend cover is over four, showing there’s plenty of room for bigger dividends in the future. This is part of what makes it a top passive income idea from my perspective. 

In summer 2020, the group paid off all its borrowings, putting it on a much better financial footing. That should also help more earnings filter through to dividends because less money goes towards repaying loans.

However, Sureserve is a pretty low-margin business and its work can be replicated by other groups, so it does not have much of a competitive moat. I think these risks are partially offset by its size and the large contracts it has with social housing groups.  I’m keen to add more shares to my portfolio.  

Technology group GB Group is another dividend growth passive income idea that I like. As with Sureserve, it also has dividend cover of around four. Dividend per share CAGR has been 34% over the last three years, which is good. The payout ratio is only 25% meaning the business is reinvesting well for future growth and not paying out too much money as income.

As with any tech stock, there’s a risk its technology gets out-innovated and competitors steal market share. Also, earnings per share growth have taken a hit recently. But I back GB Group to get back in the groove. I’m tempted to add it to my own portfolio for sustainable passive income. For me, it’s a top passive income idea, when it comes to getting dividends from UK shares. 

Andy Ross owns shares in Sureserve. 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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Royal Mail (LSE: RMG) is as quintessentially British a company as Lloyds or Rolls-Royce. It’s a part of the commercial furniture of the UK. But behind the familiar red vans that we’ve come to associate with parcels and letters delivery lies an impressive company from a financial perspective. Last Friday though, shares of Royal Mail were down 5%. And despite a rise on Monday, they still haven’t recovered. There may not be reason for alarm just yet, but the stock did go up 49% last year. So why has it seen a rocky start to 2022?

Delays and JP Morgan

Nobody likes it when the letter or parcel they’re expecting (or sending) arrives late. It’s just human nature — we want our stuff and we want it now. Investors seem to agree. Royal Mail is currently experiencing delays across at least 128 postcodes in the UK. The reason is that the company is understaffed in certain areas due to the ongoing pandemic. Such news has appeared more and more often since December. This has reportedly prompted the JP Morgan subsidiary, JP Morgan Cazenove, to reduce its profit forecast for the company by 6%-7%. 

This, and general negative feelings about the disruptions, is probably what the market was reacting to on Friday when investors knocked that 5% off Royal Mail’s share price. JP Morgan believes that its staff problems are going to affect the ability of the business to operate optimally over the next few months. It speculates that of its 1,200 delivery offices in the UK, 77 of them are currently experiencing “material difficulties with service levels”. This is up from just 20 at the end of last year.

The underlying business 

Despite the delays, Royal Mail has enjoyed some exceptional returns through the pandemic. Earnings for the first half of the 2021/22 fiscal year were released in November and showed basic earnings per share were up to 30.3p from 0.4p in the same period a year earlier. Domestic parcel volumes improved by 33%, a reflection of how Royal Mail has risen to the challenge of more and more online shopping. Revenues were up 7% and profits were 10% higher too. The question remains though: is now a good time for me to buy this stock?

To buy or not to buy 

Royal Mail has certainly seen an impressive last 24 or so months. It’s hard to ignore the all-around growth the company has been experiencing.  It’s also hard to ignore the fact that the company is going to have to keep shelling out overtime payments to staff who are still working while maintaining its relatively generous sick pay to those who have come down with Covid-19 or have to isolate due to contact with sufferers.

I feel there is still some real value to this stock though. If 2022 is indeed the year in which we get the pandemic under control, RMG’s issues could soon be a thing of the past.

With a price-to-earnings ratio of just 5.69, this stock looks good value and is hard for me to pass up. While I remain cautious, it is a stock I would buy in 2022.

Stephen Bhasera has no position in any of the shares mentioned. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has recommended Lloyds Banking Group. 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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I don’t own shares in GlaxoSmithKline (LSE: GSK) or Unilever (LSE: ULVR), but my reasons for wanting to buy them have grown stronger. Actually, I do indirectly own a little of each through my holding in City of London Investment Trust, but both have now risen on my shortlist.

The two companies’ share prices moved strongly on Monday. At the time of writing, late morning, Glaxo shares are up 4% while Unilever is down 7%. But it’s not the movements that attract me. No, it’s the reason behind them.

Glaxo’s Consumer Healthcare division has never, in my view, fitted in with pharmaceuticals development. And that’s one of the things that’s held me back from buying in the past. I mean, what’s Sensodyne got to do with monoclonal antibody development? Or Eno with malaria vaccine research?

A consumer healthcare sell-off has long been in the pipeline, and Unilever has just made a bold move. The consumer products giant has offered £50bn to take the division off Glaxo’s hands. It’s apparently the third-largest takeover bid in UK stock market history, but commentators are already suggesting it could undervalue the target.

Glaxo was quick to reject the offer, saying that it “fundamentally undervalued the Consumer Healthcare business and its future prospects“. With the drugs firm reportedly valuing the division at £47bn-£48bn, Unilever did offer a pretty thin premium. But, as usual with such things, I’d say it’s likely there will be further offers. And I wonder if anyone else might want to get in on the act? It could get quite exciting if that were to happen.

Unmissable Unilever dip?

Why does the news make the two companies more attractive to me? Well, for one thing, there’s Unilever’s valuation. Sentiment seems to be against it right now, and the share price is down 16.5% over the past 12 months. Unilever’s 2021 first-half underlying earnings came in at €1.33 per share, compared to the €1.48 recorded for the full year in 2020.

To me, that suggests the 12-month fall in the Unilever share price is an anomaly, and I reckon it’s unjustified. I’ve always seen Unilever as one I’d like to buy on the dips. And the current dip is making it look like a good time for me to get in.

GlaxoSmithKline good value?

What about GlaxoSmithKline? a 20% rise in the past 12 months suggests there’s no dip to buy on here. But we’re still looking at a five-year gain of only a modest 10%. Glaxo shares are still well below their peak of January 2020. So GSK is also still on my candidates list. At the moment, though, Unilever is looking the better bargain to me.

Perhaps ironically, if I bought both Unilever and GlaxoSmithKline, and if the Consumer Healthcare bid is ultimately successful, I’d end up owning the same stuff. The only difference would be in who manages which parts. But Unilever in charge of consumer products makes a lot more sense to me.

Alan Oscroft owns City of London Inv Trust. The Motley Fool UK has recommended GlaxoSmithKline and Unilever. 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.

International Consolidated Airlines Group (LSE: IAG) is the third-largest European airline group. Its carriers include British Airways, Aer Lingus, Iberia, and Vueling. Shares in IAG currently trade at around 33% of their pre-pandemic price, but I don’t think that this by itself means that they’re cheap. After all, a tin of beans reduced from £100 to £33 is still a really expensive tin of beans! For me, the question of whether or not the IAG share price is cheap comes down to what investors have to pay and what they can expect to get from the underlying business in exchange.

IAG’s current share price represents a cost of £8.1bn to buy the entire company. According to the company’s most recent financial statements, the company has £6.35bn in cash, £16.5bn in debt and lost £5.2bn in free cash in 2020. Paying £8.1bn to take on a company with negative cash flows and £16.5bn in debt in exchange for £6.5bn in cash doesn’t seem like a great investment opportunity to me. But investing is about looking past the most recent news to try and figure out what the future might look like, and I think that IAG’s 2020 losses are clearly the result of some temporary headwinds.

The recent travel restrictions have severely impacted airlines in general, and IAG in particular. Being unable to operate has left it unable to bring in money by selling seats, whilst still having to pay most of its usual costs on things like aircraft, fuel, and staff. As a result, it has had to raise money by taking on debt, issuing shares , and relying on government assistance. But I don’t think that this is going to last forever. The question is how things will look when normality resumes.

Before the pandemic hit, IAG reported positive free cash flows. In 2019, the company generated £448m in free cash. If IAG can return to these levels quickly, I think the investment proposition looks somewhat better. In exchange for paying £8.1bn and taking on £16.5 of debt, an investor would get £6.35bn in cash and a business that generates £448m per year. This would represent an investment return of 2.45% per year. But whether or not this means that IAG shares are cheap, for me comes down to how this return compares to the returns on offer elsewhere.

Applying similar calculations to other companies leads me to think that a 2.45% return is not that high. In the UK, applying the same calculation implies a 6.14% return from Unilever and a 4.67% return from Lockheed Martin. I therefore don’t think that IAG’s shares are cheap compared to other alternatives.

For me to think that shares of IAG are cheap, I would need to think that the company is going to significantly exceed its 2019 cash flow levels. This might happen, but it isn’t obvious to me that it will. Whilst the relaxing of pandemic restrictions might cause the release of some pent-up demand for travel and a sharp upward movement in the share price, I find it hard to see the kind of investment returns from the underlying business that would lead me to think that IAG’s shares are selling cheap, and so I won’t be buying them any time soon.

Stephen Wright owns shares of Lockheed Martin. The Motley Fool UK has recommended Lockheed Martin and Unilever. 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.

Key points

• FTSE 100 companies can be great income stocks
• Some corporations could see growing earnings over the next decade
• Rising earnings could support dividend growth

When looking for income stocks, I like to focus on high-quality, blue-chip companies such as those listed in the FTSE 100. 

While there is always a place in my portfolio for smaller businesses, when it comes to income, I believe larger enterprises tend to have more substantial balance sheets. This is a quality I look for in potential income investments. 

With this in mind, here are some dividend stocks I would buy for my portfolio today, to hold until 2030. 

Dividend champions

The first companies on my FTSE 100 income list are the insurance groups Legal & General and Aviva. These corporations offer pension and life insurance products, among others. This suggests they operate a conservative business model built for the next few decades. They cannot risk going out of business and leaving millions of consumers in the lurch. 

As such, I think they would make perfect income investments for the next decade. They are likely to set their dividends at sustainable levels and focus on long-term growth rather than short-term profit. Both companies offer dividend yields of around 6%, at the time of writing. 

Some risks they could encounter going forward include regulatory headwinds. Regulators may force them to reduce their dividends if they believe they are not holding enough capital to meet obligations. 

FTSE 100 growth and income 

I would also acquire Dechra Pharmaceuticals for my portfolio of income stocks. Although this company only supports a dividend yield of 1%, at the time of writing, it has a strong presence in the animal pharmaceutical market. It also has a robust product pipeline and fantastic growth potential over the next few years. 

These tailwinds could help the enterprise grow its earnings substantially over the next few years. And this growth could provide headroom for the firm to raise its dividend further from current levels. 

Of course, this is not guaranteed. Competitive headwinds could hit growth and profit margins, curbing the amount of cash Dechra can return to its investors.

Mining bonanza 

The mining industry is currently experiencing somewhat of a goldilocks moment. Cost savings from automation as well as surging commodity prices are two of the factors enabling the industry to report blowout profits. 

At the time of writing, shares in BHP and Rio Tinto currently offer dividend yields of up to 10%.

With governments worldwide planning to spend significant sums over the next couple of years to reinvigorate economies following the pandemic, I think the current commodity boom can continue. As such, I am excited about the outlook for BHP and Rio. They may be able to maintain their dividends at current levels in this environment.

Despite this bright outlook, commodity prices can fall just as fast as they rise. This means there is no guarantee that either of these FTSE 100 companies will maintain their payouts. Profits could slump if commodity prices come under pressure. 

Rupert Hargreaves 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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NIO (LSE: NIO) stock climbed last week, rising just under 7%. The main reason for this was some bullish electric vehicle (EV) coverage by Macquarie analyst Erica Chen. Essentially, she said that she believed investors should be buying EV stocks. She also assigned a price target of $37 for NIO stock, which is over 20% higher than its current trading levels. Investors seemed to have heeded this message, pushing the shares to over $30 at the close of the week.

In addition to this, NIO’s corporate communications chief released a statement highlighting the $69,700 average sale price for December. Only Mercedes Benz had a higher average price than this in China, highlighting NIO’s presence in the market.

Where next?

Chen also shared her belief that the EV manufacturer’s sales would grow at roughly 50% annually for the next few years. NIO sold 91,429 vehicles in 2021, up 109% year-on-year. For context, Tesla sold just under one million vehicles in 2021. Growing at 50%, it would take NIO six years to reach such numbers, which seems encouraging to me.

NIO has proven itself to be capable of fast growth too. For example, 2021 Q3 deliveries rose 100% year-on-year, reaching 24,439. The fact that the firm has been able to deliver these high-growth numbers gives me confidence that it will deliver more growth moving forward.

Headwinds for NIO stock

The biggest risk I see for NIO stock in the short term is the continuing threat of covid-19. Causing huge supply chain issues, it has continually hindered NIO’s performance. For example, in October, deliveries fell 65% due to supply problems. With new variants increasingly cropping up, this could place a lid on its growth moving forward.

Medium term, I think that the current macroeconomic environment could put pressure on NIO stock. Fiscal stimulus — used by governments to ease the pandemic’s economic effects — has created a wave of high inflation, which central banks are now combatting by raising interest rates. When this happens, equities are usually pressured, with growth stocks like NIO being hit the hardest.

Over the long term, competition is likely to be a risk too. Ford and General Motors are just some of the household vehicle names that are pouring billions into EV production. NIO will have to fight off these better-equipped, more established firms if it wants to retain its presence in the market.

The verdict

Overall, I think that the current price level could offer a great entry point to add more NIO shares to my portfolio. The fact that top-level analysts are reiterating this message also gives me confidence. There are headwinds that it needs to overcome, but for me, the explosive growth and current low share price outweigh these. As such, I would consider buying more stock for my portfolio today.

Dylan Hood owns shares of Nio. 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.

Key points 

• The Santander share price appears cheap 
• With interest rates rising, the firm’s profits look set to rise 
• The international footprint gives it a competitive edge 

I think the Santander (LSE: BNC) share price is one of the most overlooked investments in the UK financial sector. 

When investors and analysts look at the UK financial sector, they tend to focus on local peers such as Lloyds, which is a mistake in my view.

Indeed, unlike Lloyds and NatWest, the company has a much larger international footprint. This could act in its favour as the global economic recovery builds over the next 12-24 months. 

Company outlook 

Over the past year, the Santander share price has struggled to move higher. The stock has traded in a range of between 220p and 300p. Overall, excluding dividends paid to investors, the shares have added 8%. Meanwhile, Natwest and Lloyds have returned 57% and 54% respectively. 

The question is, why has the stock performed so poorly compared to its domestic peers? I think the firm’s sizeable European presence is to blame.

While the Bank of England has started hiking interest rates, which should enable banks to increase the rates they charge to consumers, in Europe, interest rates are nailed firmly below 0%. It does not look as if this is going to change anytime soon. 

Still, only a third of Santander’s underlying profit comes from Europe. The South American and North American markets make up another 60%. Digital services make up the remainder. 

And it is not as if the low-rate environment is holding the business back. For the third quarter of 2021, the firm reported a near 100% increase in European profits. Overall, the underlying profit before tax was €11.4bn in the first nine months of the year, up 74%. 

Santander share price opportunity 

I think this presents an opportunity for long-term investors. With profits surging and the Santander share price not reflecting this growth, the stock is starting to look cheap. At the time of writing, the stock is selling at a forward price-to-earnings (P/E) multiple of 7.1.

To put that into perspective, Lloyds and Natwest are trading at multiples of 8.5 and 10.3 respectively, giving an average of 9.4.

Still, as domestic UK banks, these businesses are not the best comparisons. A better option could be HSBC. This firm is one of the world’s largest international banks. Right now, the stock is selling at a P/E of 10.8. 

These figures show that Santander appears undervalued compared to its peers in the financial sector. 

However, some risks could hold the bank back in the near future. These include the potential for future economic disruption from the pandemic as well as rising wage inflation around the world. 

Despite these headwinds, I think the Santander share price looks cheap. As such, I would be happy to add the stock to my portfolio today. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. 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.