The economic outlook remains fraught with danger as the Covid-19 crisis rumbles on. Still, here are two dividend-paying UK shares I’d happily buy in hopes of making big returns in 2021 (and beyond).
#1: A UK share already in my portfolio
I already own shares of DS Smith (LSE: SMDS) in a Stocks and Shares ISA. One of the reasons why I bought this UK stock was because demand for its cardboard boxes and other packaging materials is soaring as e-commerce explodes across the globe.
Latest data from Barclaycard illustrates how fast internet retailing is growing. It showed that online spending at the company’s card processing business soared 73.2% in January.
The e-commerce boom is causing some near-term issues for DS Smith, though. As chief executive Miles Roberts recently told the BBC, the UK share faces a struggle to get boxes back into the recycling chain so it can keep making products. This could have a significant impact on its ability to meet demand and thus to keep growing revenues. The FTSE 100 stock also operates a full recycling and waste management service on top of making packaging products.
DS Smith offers inflation-beating dividend yields for the next couple of years. Assuming they happen, these sit at 3.3% and 3.9% for the financial periods to April 2021 and 2022 respectively. Annual dividends here rose at a compound annual growth rate of around 20% in the nine years to 2020. And I’m expecting them to get strongly back on the front foot from 2021 onwards.
#2: Safe as houses?
I think that getting exposure to the private rented sector is a good idea too. I wouldn’t do it by investing directly in buy-to-let though. Big upfront costs, running costs and tax bills make this an unattractive strategy for me.
Instead, I’d invest in UK stocks like The PRS REIT (LSE: PRSR). In its own words, this particular company focuses on “high-quality, new-build family homes for the private rental market.” I think investing in real estate investment trusts (or REITs) is an especially good idea as rules state that they must distribute at least 90% of yearly profits to shareholders through dividends.
The supply of rental properties continues to lag supply. And this keeps on pushing tenant costs higher. According to Zoopla rents grew 2.3% in the final three months of 2020, up from 1.3% a year earlier. This of course bodes well for the likes of The PRS REIT. And it leads City brokers to predict further annual dividend growth at the UK share over the medium term. This means the company carries huge dividend yields of 5% and 5.3% for the fiscal years to June 2021 and 2022 respectively.
There are risks to The PRS REIT in 2021, however. An improving outlook for the UK economy could boost homebuyer appetite and consequently reduce renter numbers. The return of low-deposit mortgages later down the line could have the same effect.
