Forget NS&I rate cuts. I’d build a 5% income portfolio from stocks instead!

In light of the NS&I rate cuts, building an income portfolio has never been so appealing, or necessary, writes Thomas Carr.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

This year was already proving tough for savers who wanted to earn a decent amount of interest. One by one, in response to the current climate, banks have been slashing their interest rates. Last week, it was NS&I’s turn to cut its savings rates. With it being so difficult to find an account or savings product that pays just 1%, we now need to cast our nets a little wider in the hunt for returns. An obvious place for us to look is the stock market. And the inevitable conclusion is that we need to build an income portfolio.

Remarkably, it’s possible to build a robust income portfolio, even in the middle of a global pandemic. Since the worst of the pandemic back in the spring, companies have slowly been reinstating their dividends. Some never stopped paying them.

The ultimate income portfolio

In fact, it’s possible to build an income portfolio that not only keeps up with inflation, but that satisfies the most demanding income-seeking investors. What’s more, the income on offer is comparable with pre-Covid levels. There may be fewer options available, but they still exist.

Should you invest £1,000 in 3i Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if 3i Group Plc made the list?

See the 6 stocks

The portfolio I’ve come up with contains eight large-cap UK stocks, and has a dividend yield of over 5%. It’s made up of IG Group (dividend yield 5%), Aviva (expected to be 5%+), Airtel Africa (7%), BAE Systems (4%), GlaxoSmithKline (5%), British American Tobacco (7%), M&G (10%), and BP (7%). As well as delivering an impressive income, this portfolio is also pretty-well diversified, covering a range of unrelated market sectors. That should reduce risk. While one sector may suffer, another may step up and outperform.

This income portfolio is also fairy evenly split into defensives and cyclicals. Defensives are likely to outperform if the current situation becomes worse. They’re also more likely to continue paying dividends come what may. Cyclicals on the other hand are better positioned to do well if things improve. There are also a couple of growth companies in there, which are either unaffected or even boosted by the pandemic and subsequent lockdown.

Cheap income stocks

On top of the impressive dividend yield of over 5%, this income portfolio also looks pretty cheap to me. All of these shares are either cheap on a price-to-earnings (P/E) or net asset basis. Aviva and M&G shares are priced at just four times last year’s earnings. BP is priced at a near £20bn discount to its net assets. The value of these shares should protect investors. Their low share prices mean that there’s less room for prices to fall.

Personally, I’d much sooner invest in this income portfolio and earn 5% interest, than put my money in a savings account where it earns less than 1%. Not only do these income stocks produce an impressive dividend, but they also have the potential to deliver share price appreciation. That’s exactly what I expect to happen. In a world of low rates, I think investors will be grabbing any chance they can get to earn these kind of returns, pushing share prices up in the process. And the NS&I savings rate cuts have only strengthened this belief.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Thomas owns shares of IG Group, BAE Systems and Aviva. The Motley Fool UK has recommended GlaxoSmithKline. 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

10.1% and 12.9% dividend yields! 2 ETFs to consider for a second income

Looking for ways to target a dependable second income in uncertain times? These ETFs could be just the ticket, says…

Read more »

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »