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When it comes to earning passive income from dividends, there are plenty of UK shares offering chunky payouts. But while most investors are drawn to the highest yields or the largest market-caps, plenty of lucrative opportunities get overlooked.
That certainly seems to be the case for Hikma Pharmaceuticals (LSE:HIK) and Premier Foods (LSE:PFD), which don’t have a lot of market buzz surrounding them. That’s despite one hiking payouts for 13 consecutive years and the other almost tripling its dividend since 2021!
Opportunities in pharmaceuticals
The last 12 months haven’t been very exciting for Hikma shares, with the generics drug manufacturer seeing its market-cap shrink by 13%. Investors have become concerned over margin pressure and guidance resets in its leading Injectables segment.
The group’s mainly suffering from an unfavourable foreign exchange headwind that’s seemingly knocked investor confidence over near-term goals. Yet while everyone is remaining focused on the short-term, the long-term outlook for Hikma continues to look rock solid, in my opinion.
Novel drugs, particularly within the GLP-1 space, are entering the market. And with an ever-increasing list of blockbuster drugs coming off patent over the next five years, the growth opportunities for this enterprise appear to be substantial.
So while the 3.9% yield may not be groundbreaking today, continued dividend hikes driven by successful execution could grow this payout into something far more substantial in the long run.
Underappreciated turnaround
Another enterprise that’s struggling to get attention is Premier Foods. The firm’s branded products can be found in almost every supermarket in Britain, commanding enormous market shares across multiple food categories.
Yet despite new management fixing the firm’s pension crisis, restoring the balance sheet and reigniting organic growth, the shares have been pretty flat lately.
Tepid investor sentiment has seemingly overlooked the firm’s rapidly expanding free cash flow generation, paving the way to higher shareholder payouts. So just like with Hikma, while the yield isn’t anything exciting today, that could quickly change over the coming years.
Risk versus reward
In my opinion, both UK shares exhibit impressive dividend growth potential. But that doesn’t mean they’re guaranteed to be winning investments. Despite operating in vastly different industries, both businesses do have a threat in common – competition.
Hikma’s US Generics business is already seeing intensifying pressure as other drug manufacturers seek to capitalise on expired or expiring patents. As for Premier Foods, economic pressure on households is pushing some consumers into the arms of cheaper private-label brands to reduce the weekly shopping bill.
In both cases, investors need to keep a close eye on the competitive landscape to ensure the dividend opportunity isn’t being compromised. But as things currently stand, Hikma and Premier appear to offer compelling passive income at reasonable prices. That’s why I’m already considering both for my dividend portfolio alongside other opportunities.
