I think one of the most effective ways to create passive income is through investing in UK dividend shares. I like the juicy dividends and the fact I don’t need to work for the income. These two stocks in particular have caught my eye for their dividend paying potential this year.
The high yielding passive income stock
Polymetal International (LSE: POLY) is a miner focused on primarily gold and silver extraction. The stock yields over 7%, making it a good provider of passive income. What’s more, the dividend cover is 1.75, which means the dividend is relatively well covered by earnings. The shares are also quite cheap on a price-to-earnings multiple of eight. This combination of income and cheapness is appealing to a value focused investor like me. There seems to be little point to me buying overpriced shares.
A recovery in the prices of gold and silver in 2022, perhaps as a result of inflation, against which gold is sometimes seen as a good hedge, could see the shares re-rate upwards.
Polymetal operates at nine mines, which means it is not reliant on any one pit for production. This limits risk to some degree. However, the mines are located in Russia and Kazakhstan, which may put some investors off.
As with any miner, further risk comes from the fact precious metal prices can fall as well as rise. This makes earnings and profits quite cyclical and lumpy. A sustained downturn could lead to the dividend being cut. Not good for passive income. However, Polymetal has raised the dividend in more years than not in recent times. Overall, I think its high yield, decent dividend cover, and share price make it a top passive income stock for my portfolio.
Consistent dividend grower
Sureserve (LSE: SUR) provides property services such as repairs for social housing and installing smart metering. As the UK looks to meet emissions targets and make buildings greener, I think the group is well placed to benefit.
On the dividend front, I think it’s also well placed to provide a sustainable growing dividend. While the shares may only yield 1% at the moment, increased earnings may push that up and the low yield provides the potential for future faster growth.
Dividend cover is over four, showing there’s plenty of room for bigger dividends in the future.
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 does not have much of a moat. I think these risks are partially offset by its size and the large contracts it has with social housing groups, for example. I will be keeping these risks in mind.
Both dividend growth and dividend yield are important considerations for me when it comes to choosing dividend shares. Combined, Polymetal International and Sureserve make a good combination for my portfolio in 2022 and the years beyond.
