2 dirt-cheap UK shares I’d buy in an ISA today to start earning a passive income

These two cheap UK shares could offer passive income potential, in my view. They could deliver superior dividend income compared to other mainstream assets.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buying dirt-cheap UK shares to make a passive income could become increasingly popular for ISA investors. Many FTSE 100 and FTSE 250 stocks currently have significantly higher dividend yields than the income returns available on assets such as cash and bonds. They may also offer dividend growth potential over the long run that further increases their appeal on a relative basis.

With that in mind, here are two UK shares that appear to offer impressive income prospects. They could increase the income return within an ISA over the coming years.

A robust passive income from a defensive FTSE 100 share

National Grid (LSE: NG) has been a popular FTSE 100 stock among passive income investors in the past. The utility company’s defensive business model has meant that it has offered greater resilience and stability than many UK shares. This may make it increasingly popular at a time when the prospects for the economy are relatively uncertain.

National Grid’s recent results showed that it remains on track to meet financial guidance for the full year. It expects to deliver annual asset growth in the mid-single-digits, which should mean that it is able to meet its goal of increasing dividends at a similar pace to inflation over the medium term. This aim may become more attractive should higher inflation be the end result of major monetary policy stimulus.

The company’s 5% dividend yield is relatively high compared to other FTSE 100 shares. Therefore, it could offer a worthwhile passive income, while having a more resilient dividend growth outlook than other UK shares. As such, it could be a relatively attractive income share while the UK’s economic outlook is challenging.

Income plus capital return prospects relative to UK shares

Rio Tinto (LSE: RIO) offers a less certain passive income than other UK shares. Its business model is reliant on the performance of the world economy, with the level of demand for commodities having a significant impact upon its bottom line.

However, the company’s recent updates have highlighted its improving financial strength. It is on target to deliver production that is in line with its guidance for the full year, with all of its assets having remained operational in the first half of the year. This allowed it to raise dividends per share by 3%. It has a dividend yield of almost 7%, which is over two percentage points higher than the FTSE 100’s dividend yield.

Clearly, the uncertain nature of Rio Tinto’s business model means there are less risky options within the FTSE 100 to produce a passive income. However, its high yield and the strength of its asset base suggest that it could offer an attractive risk/reward opportunity over the long run within a diverse ISA portfolio of UK shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Rio Tinto. 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.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »