Building a dividend stock portfolio capable of generating a ton of passive income is super easy right now. Today, there are loads of UK shares that are sporting sky-high yields.
Here, I’m going to construct a hypothetical four-stock income portfolio with a yield of 7.8%. With a total investment of £10,000, this portfolio could potentially generate income of nearly £800 a year (tax-free if the stocks were held in a Stocks and Shares ISA).
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Income from shares
In the table below, I’ve listed four FTSE 100 stocks from different industries and their forward-looking dividend yields. I’ve also listed how much dividend income each stock could potentially generate a year from a £2,500 investment.
| Stock | Industry | Forward-looking yield | Annual income from a £2.5k investment |
| Sainsbury’s | Consumer Goods | 5.9% | £148 |
| Aviva | Insurance | 8.0% | £200 |
| M&G | Savings & Investments | 10.5% | £263 |
| BP | Oil & Gas | 6.8% | £170 |
Of the four companies, savings and investment giant M&G (LSE: MNG) has the highest yield at 10.5%. The average is about 7.8% though, meaning that £10k invested in the four stocks would generate annual income of about £780.
That isn’t guaranteed, but I’m sure readers will agree that that’s an impressive yield. It’s almost twice the rate available from a UK savings account today.
The risks of dividend stocks
Of course, stocks and savings accounts are very different. With a savings account, capital’s safe. And the interest rate offered is guaranteed.
With stocks, capital is at risk because a company’s share price can fall. And dividends are never guaranteed. Sometimes, if a company experiences a drop in profits, it will reduce or cancel its dividend payout to conserve cash.
Going back to the four companies in the table, three of them (Aviva, BP, and Sainsbury’s) have reduced their dividend payouts at times over the last decade when they were experiencing challenges.
So we needs to do a little bit of research before buying dividend stocks for income. It’s not smart to jump into a stock just because it has a high yield.
My pick
Of those four, I like M&G the most, although I’m not buying as I already hold Prudential.
As a savings and investment company, I think it has a relatively bright future, given that people across the world (it operates in over 25 countries) need to save and invest more for retirement.
And the shares look pretty cheap today. Currently, M&G sports a forward-looking price-to-earnings (P/E) ratio of eight, which is well below the market average.
Of course, the risks I mentioned apply here. While the company hasn’t cut its dividend payout since it came to the market in 2019 (when it was split from Prudential), there’s no guarantee it won’t do so in the future.
And there’s the possibility of share price weakness. This kind of company can see its share price take a hit if there’s volatility in the financial markets and the value of assets under management drop.
Building a proper dividend stock portfolio
Given that each company faces unique risks, it’s smart to own at least 15 different stocks in a dividend income portfolio. This can significantly reduce stock-specific risk.
The good news is that there are plenty of high yielders in the UK stock market to choose from today. If you’re looking for investment ideas, you can find plenty right here at The Motley Fool.
This post was originally published on Motley Fool
