3 British dividend stocks I’d buy for passive income

Investing in dividend stocks can be a great way to generate passive income. Here, Edward Sheldon looks at three British dividend shares he’d buy now.

| 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.

A person holding onto a fan of twenty pound notes

Image source: Getty Images.

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.

Investing in dividend stocks can be a great way to generate passive income. Pick the right stocks (it’s crucial to be selective because dividends are never guaranteed) and you could be paid regular income for the rest of your life.

Here, I’m going to discuss three British dividend stocks I’d buy for passive income. All are reliable dividend payers and in my view, having the potential to deliver strong long-term total returns (capital gains and dividends). 

A defensive stock for passive income

One of the first dividend stocks I’d pick today if I was building a passive income portfolio would be Unilever (LSE: ULVR). It’s a leading FTSE 100 consumer goods company that owns a world-class portfolio of well-known brands (Dove, Domestos, Lipton, etc). Currently, the stock offers a prospective yield of about 3.5%.

Unilever has a lot going for it from an income investing perspective. For starters, it’s a stable ‘defensive’ business. Unlike highly ‘cyclical’ companies, Unilever doesn’t suffer from large decreases in revenue and earnings every few years. This means dividends are quite consistent. Secondly, it has attractive long-term growth prospects due to its emerging markets exposure. As the company grows over the long run, it should continue to raise its dividend payouts.

Unilever shares aren’t without risk. If growth slows, the share price could fall and/or the dividend could be cut. However, with the stock trading on a forward-looking P/E ratio of less than 20, I think the risk/reward proposition here is attractive.

A British dividend legend

Another British dividend stock I’d buy today is Smith & Nephew (LSE: SN). It’s a healthcare company that specialises in joint replacements. The prospective yield here is about 1.8%.

Smith & Nephew is nothing short of a dividend legend. This is a company that’s paid a dividend every single year since 1937. Even when sales fell significantly during Covid-19, SN paid a dividend. That’s the kind of reliability I’m looking for when I invest in dividend stocks for passive income.

I think this company has attractive prospects for both short- and long-term growth. In the short term, it should enjoy a rebound in sales as medical procedures are resumed, post Covid-19. Meanwhile, in the long run, it should benefit from the world’s ageing population. This long-term growth could result in larger dividends.

This isn’t a cheap dividend stock. Currently, the forward-looking P/E ratio is 24. This adds risk to the investment case. I’m comfortable with this valuation, however, given the company’s track record and growth potential.

A top FTSE 100 dividend stock

Finally, I’d also pick Sage (LSE: SGE) for passive income. It’s a leading provider of cloud-based accounting solutions. Its prospective yield is about 2.7%.

This is another high-quality FTSE 100 business. Recurring revenues are high, and the balance sheet is solid. Meanwhile, growth potential is significant. Analysts at Citi expect the company to generate revenue growth of 7% per year between now and 2025. All in all, I think SGE is a great dividend stock.

A key risk here is the threat of competition. One particular rival that could steal market share is Xero, which has a great offering. This is something I’ll be keeping an eye on. It could impact growth and the dividend. The valuation here is also quite high (forward P/E of 27), which adds risk.

Overall, however, I see a lot of appeal in this dividend stock.

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.

Edward Sheldon owns shares in Unilever, Smith & Nephew, Sage, and Xero. The Motley Fool UK has recommended Sage Group and Unilever. 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

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »