Best UK shares: I’d buy these stocks for a passive income – Yahoo Finance UK

Various denominations of notes in a pileVarious denominations of notes in a pile
Various denominations of notes in a pile

Many people dream of creating a passive income. While it takes work and patience, I believe it can be done by investing in solid shares. I think these two investment trusts, which pay their dividends quarterly, could help. You can take the dividends and reinvest them to benefit from compounding or, of course, take the dividends as passive income.

A quarterly dividend to help with passive income

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Merchants Trust (LSE: MRCH) was doing well until Covid-19. This is especially true when you consider that it’s an income-focused trust holding many big names that weren’t flavour of the month. The shares even traded at a premium to their net asset value (NAV). Covid-19 changed this. The shares are now back trading at a small discount of around 3.5% to NAV. Even better for income investors, the dividend yield is over 7%.” data-reactid=”25″>Merchants Trust (LSE: MRCH) was doing well until Covid-19. This is especially true when you consider that it’s an income-focused trust holding many big names that weren’t flavour of the month. The shares even traded at a premium to their net asset value (NAV). Covid-19 changed this. The shares are now back trading at a small discount of around 3.5% to NAV. Even better for income investors, the dividend yield is over 7%.

The big question is, can this be sustained?

Management are certainly keen to keep the trust’s status as a ‘dividend hero’, a trust that has kept consecutive years of income rises. The trust plans to dip into its savings to protect shareholder payouts this year.

However, this is not sustainable. What is needed is for companies to reinstate their dividends so the trust doesn’t deplete its reserves to pay for the dividend in the short term.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="I’m confident this will happen. I would buy Merchants Trust to create a passive income as it holds many dividend-paying companies. The top holdings are GlaxoSmithKline, British American Tobacco, Imperial Brands, BHP Group, and National Grid.” data-reactid=”29″>I’m confident this will happen. I would buy Merchants Trust to create a passive income as it holds many dividend-paying companies. The top holdings are GlaxoSmithKline, British American Tobacco, Imperial Brands, BHP Group, and National Grid.

Getting growth from high-flying US tech stocks 

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The Bankers (LSE: BNKR) investment trust gives investors something a little different. It has very different holdings than Merchants, with much more of a tilt towards the high-flying, in-favour US tech stocks. Top holdings include Microsoft, Amazon, and Visa.” data-reactid=”31″>The Bankers (LSE: BNKR) investment trust gives investors something a little different. It has very different holdings than Merchants, with much more of a tilt towards the high-flying, in-favour US tech stocks. Top holdings include Microsoft, Amazon, and Visa.

As a result, the trust has a much lower dividend yield. It currently provides investors with a yield of 2%. The shares in the trust also trade a premium to NAV of around 1.5%. This then is no hidden gem or recovery play. The trust’s shares will need to stay in demand if the share price is to keep going higher.

From a passive income point of view though, it complements Merchants well, as a very different type of trust. The trusts both pay dividends quarterly giving investors a regular cash flow.

I’m pleased to see the Bankers dividend has been rising steadily for the past two decades and I expect this can continue. If the shares fall to a discount to NAV I would be even more tempted to pick some up. It provides both income and growth potential. 

If you wanted to invest directly, companies such as GlaxoSmithKline also pay their dividend quarterly. Biannual dividend payments are far more common. This could also help make sure you can create a passive income while diversifying your investment portfolio.

The post Best UK shares: I’d buy these stocks for a passive income appeared first on The Motley Fool UK.

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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Andy Ross owns shares in Merchants Trust. 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.” data-reactid=”45″>Andy Ross owns shares in Merchants Trust. 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.

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