There are many ways to generate passive income in today’s digital world. My own preference is to invest in UK stocks that pay dividends into my Stocks and Shares ISA.
At the moment, I have around 20 dividend-paying stocks in my portfolio. This diversification helps me sleep better at night because no single payout is assured. It’s far better to spread risk.
However, if I had to choose just two stocks, I’d plump for this pair of blue chips.
Financials
First up is insurer and asset manager Legal & General (LSE: LGEN). This FTSE 100 stock is a stalwart in my income portfolio and currently boasts a juicy 8.1% dividend yield.
Analysts expect the firm’s dividend to rise to 21.4p per share this year. Based on the current share price of 248p, this translates into a massive prospective 8.6% yield.
L&G has a fantastic long-term track record of raising its dividend.
| Financial year | Dividend per share |
| 2025 (forecast) | 22.6p |
| 2024 (forecast) | 21.4p |
| 2023 | 20.3p |
| 2022 | 19.4p |
| 2021 | 18.5p |
| 2020 | 17.6p |
| 2010 | 4.7p |
| 2000 | 3.7p |
One potential risk I’d highlight here is new management. We’ve yet to hear details of the strategy moving forward but there is a widespread assumption that international growth will become more of a focus.
While that could be positive for growth, it also introduces execution risk and uncertainty. And markets don’t tend to like stuff like that.
Nevertheless, the long-term picture looks attractive to me. As people live longer, they’ll clearly need to save and invest for an extended retirement.
This creates a larger potential market for L&G’s retirement products, such as annuities and lifetime mortgages, as well as wealth management and inheritance planning.
Industrials
Second, I’m going with BAE Systems (LSE: BA.). After rising 71% in two years, this defence stock doesn’t carry a particularly high dividend yield any longer. Currently, it is just 2.3%.
However, the firm raised its payout by 11% in 2023, and I think more above-inflation rises are on the cards. That’s because global defence budgets are rising around the world as nations seek to defend themselves in an increasingly uncertain world.
As I write this (12 April), the terrible war in Ukraine has been going on for 778 days, with no end in sight. Meanwhile, the Middle East situation looks bleak and the US and China continue their sabre-rattling.
The best protection starts with an unyielding resolve to do whatever we [US] need to do to maintain the strongest military on the planet — a commitment that is well within our economic capability.
Jamie Dimon, JPMorgan Chase 2023 annual report
In 2023, BAE’s order backlog rose to £69.8bn, up from £58.9bn in 2022. Net profit was £1.85bn and is forecast to rise above £2.2bn in 2025.
One issue here is that the stock now trades on a price-to-earnings (P/E) ratio of 21.7. For context, the P/E ratio was just 13.5 at the end of 2019. So this isn’t a cheap stock any longer.
That said, Russia’s invasion of Ukraine has changed everything. European re-armament is likely just getting started, with 13 of 32 NATO countries still to meet their committed 2% spend of GDP on defence.
Consequently, I think the BAE share price and dividends will trend higher from this point.
