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Who doesn't like the idea of getting paid for doing nothing? I'm always exploring ways to generate passive income and I think high-quality UK shares could be the answer.
With many years to go until retirement, I have started to think about supplementing my salary with other forms of income. One that has piqued my interest is a steady stream of dividends for years to come.
If I'm going to aim for £10,000 a year in passive income, I want it to come from reliable (or at least historically reliable) dividend payers that are in non-cyclical industries capable of weathering market cycles.
A large-cap stock that meets the requirements
I've been focusing on the larger segment of the market. I like FTSE 100 Index stocks that are industry leaders and have a strong track record of delivering a solid dividend yield to investors. Footsie itself has an annual yield of 3.7%, so ideally I would like to receive a higher figure.
One name in particular that caught my eye is National Network (LSE:NG) is one of the world's largest publicly traded utilities, focused on the transmission and distribution of electricity and gas.
I like the generally stable and defensive profile of utilities. There is usually strong demand for electricity and gas despite the ups and downs of the economy.
It is true that the energy transition business faces some challenges in the medium and long term, but I believe that large entities such as National Grid are well positioned to adapt as necessary.
National Grid as a passive income perspective
Shares in the utilities group fell in May following the publication of its annual results. The company announced a capital increase of 7 to 24 shares, which surprised investors.
This rights issue will impact the company's current dividend yield of 6.2% as dividend payments will be distributed across a larger number of shares. However, the expected yield is still expected to be around 5.7% per annum.
However, my investment horizon for a potential passive income investment is at least five years, so I am not as concerned about short-term volatility.
Based on that estimated 5.7% yield, I can calculate how much I would need to invest to generate £10,000 per year in passive income.
That magic number is £175,439 invested. At National Grid's current share price of 918p, that equates to 19,111 shares.
Potential dangers
While all this sounds great in theory, it is clear that it comes with risks. For one thing, dividends are discretionary and boards are often reluctant to cut them, but that happens.
In the specific case of National Grid, I am looking at its debt load. The company has £43bn of debt on its balance sheet as it continues to invest in its future growth.
However, the higher interest rate environment is certainly a factor when it comes to cash flow. The more cash needed to pay down large debt balances, the less free cash flow is available to shareholders.
One for the future
I am interested in building a diversified portfolio that can generate the passive income I want. National Grid is just one of many dividend stocks that could help me achieve that.
While I don't have the money to invest right now, it's certainly on my radar as I work towards that £10,000 figure.
