With the recent volatility in the stock market, it’s easy to see why many investors are turning to low-risk assets like income bonds. But despite the increases in interest rates, these financial instruments still offer meagre returns compared to some UK dividend shares.
With that in mind, here are two British stocks that, in my opinion, offer attractive passive income prospects.
What if UK dividend shares offered inflation-adjusted returns?
One of the primary catalysts behind the ongoing stock market correction was the spike in inflation, especially in regard to energy bills. But what if there was a way to profit from the surging electricity bills? That’s where Greencoat UK Wind (LSE:UKW) comes into the picture.
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The company owns a portfolio of onshore and offshore wind farms scattered across the UK. The business model is simple:
- Acquire a stake in a wind farm
- Let it generate clean electricity
- Sell that electricity to the national grid through a long list of corporate clients
The proceeds are then distributed to shareholders through an impressive 4.6% dividend yield that management automatically increases in line with the retail price index – a proxy for inflation.
With fixed operational costs, the rise in electricity prices has translated into almost pure profit. So it’s not surprising that in the last six months underlying earnings exploded from £128m in 2021 to £566m at a 97% profit margin!
These elevated prices obviously won’t last forever. And when regulators inevitably reduce the price caps, they could stay that way for a prolonged period as they have done in the past. Needless to say, that wouldn’t be good news for the shares of this UK dividend group.
Regardless, I feel it’s a risk worth taking. The skyrocketing earnings grant management a lot of flexibility to improve the balance sheet’s strength and reinvest for long-term growth. And that’s why I recently added some shares to my income portfolio.
Earning a passive income through royalties
The mining sector is not short on UK dividend shares offering impressive payouts. But one from my portfolio that continues to be my favourite in this space is Anglo Pacific Group (LSE:APF). It’s a royalties business that funds mining companies to establish a new extraction site in exchange for some of the dug-up materials.
Historically, the bottom line has primarily been driven by its coal assets. And that’s still true today. However, management has long since been reducing its dependence on the material by diversifying its product portfolio. Lately, it’s been hyper-focused on adding more cobalt, nickel, and copper projects to help meet the demand for electric vehicle batteries and renewable energy technologies.
Mining is a cyclical industry. And while Anglo Pacific may not be doing any drilling, it’s just as susceptible to fluctuating commodity prices. We’ve already begun to see some raw materials drop on fears of a recession. And one of its most lucrative coal mines is coming to the end of its life within the decade.
Those risks can’t be ignored. But management seems to have a sound strategy for replacing the eventual revenue loss. And with global cobalt supply highly restricted, I believe these UK dividend shares offer an attractive long-term source of income at a 4.5% yield. That’s why I’m considering topping up my current holdings.
