A bit of extra income always sounds good to me. That's one of the reasons I invest in UK income shares. While it can be tempting to spend the extra income, over time it can add up to substantial growth of my original investment.
Here is how I would invest GBP2,000 in UK income shares today in the hope of turning it into GBP3,000.
I would want to reduce my risk by investing in diverse shares. Sometimes a whole sector can fall out of favour. So by diversification I don't just mean between companies, but also sectors.
With GBP2,000 in hand I would likely choose four names, putting roughly GBP500 in each of them.
Choosing high-yield sectors
Then I would look at which sectors offered a high yield. It is easy to find information about the highest yielding shares, so I would likely start there and see what sectors cropped up. One point to make here is that such data is often backwards looking.
That is a useful guide. But for my income plan, I would pay attention to the possible future payout rate. Dividends are never guaranteed, but I would pay attention to any likely shifts in profitability.
Currently, four sectors I would pick for UK income shares are tobacco, financial services, energy, and retail.
UK income shares I'd pick
For tobacco, I would buy into Imperial Brands. A decline this week due to concerns about possible changes to US nicotine level rules provides me with a buying opportunity. It also highlights longer-term risks that lower demand could reduce profits in future.
A yield of 9.4% suggests my GBP500 could generate around GBP47 annually in passive income. In financial services, I would choose M&G. The company pays a dividend equivalent to 8.6% of the current share price.
So GBP500 would earn around GBP43 a year at that level. M&G recently increased its dividend by around 2%. However, one risk is that any economic downturn could lead to a reduction in investment activity, which would hurt M&G's profits.
For energy, I'm tempted by the yield of Diversified Oil and Gas. But its limited history as a listed company means I don't feel comfortable estimating its future payout level. So I'd probably plump for BP.
The oil major cut its dividend last year, but still offers a prospective yield of 5.4%. That would equate to GBP27 a year for my GBP500 stake. BP's move into renewable energy might boost future returns - but if margins are lower, it could damage them.
Finally retail operator Tesco yields 4.4%, or around GBP22 a year on a GBP500 investment. Tesco is a bellwether UK retailer that last week maintained its final dividend. But as the results showed, risks include increased costs for online fulfilment.
Passive income streams
Taken together, these four UK income shares could offer me around GBP139 in passive income.
That might not sound much, but it would help me get to my target of turning GBP2,000 into GBP3,000. If the dividends were maintained, I could achieve that target in under seven years. It could be faster if dividends are increased, although they could also be cut or cancelled.
Another way to speed up achieving my goal would be to reinvest the dividends instead of keeping them in cash.
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christopherruane owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands and Tesco.
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.
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