How I’d invest £20,000 in UK shares to target £1,500 a year in passive income

Right now, UK shares offer a golden opportunity to build amazing high-yield passive income from scratch. Our writer explains how he’d go about it.

| More on:

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.

UK stocks are offering some of the highest dividends anywhere in the world right now. These can provide a steady and growing source of passive income for investors.

Here, I’ll go through the steps I’d take to aim for £1,500 a year in dividends from a £20k investment.

Getting started

For the purposes of this article, I’ll assume I have a £20k lump sum to invest. This is the current annual allowance on a Stocks and Shares ISA. Investing through an ISA this way means any returns I make are shielded from capital gains and income tax.

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.

Building a resilient portfolio

To aim for £1,500 a year in dividends from £20,000, I’d need to invest in a group of stocks that collectively yield 7.5%.

There’s no hard and fast rule on how many stocks a portfolio should have. It depends on one’s risk tolerance and experience. But I’d certainly want at least 10 stocks if I’m just starting out. That’s because no individual dividend is every guaranteed.

Take Tesco, for example. Britain’s largest grocery chain was once considered a core holding for UK dividend investors. It upped its payout for 27 years until 2012.

Then it ran into a number of financial difficulties and in 2014 cut its interim dividend by 75%. The following year it pulled the plug entirely and the payout didn’t return until late 2017 (at a far lower yield).

Clearly, this would have been disastrous for investors whose income portfolio wasn’t adequately diversified.

The lesson is that it pays (quite literally) to have a nice spread of high-quality dividend stocks to offset the risk of cancellations and reductions.

Too cheap to ignore any longer

So what would qualify as a high-quality income stock in my book?

Well, one that I recently bought was HSBC Holdings (LSE: HSBA). At 637p, the stock is currently trading at a ridiculously cheap 5.8 times earnings and below its book value.

For 2023, City analysts expect the bank to dish out a total dividend of $0.63 per share (50p at current exchange rates). That puts the dividend yield at a mighty 8%.

There’s also a special dividend expected this year after the company offloaded its Canadian business for $10.2bn. That would put this year’s yield at just over 10%!

Now, given the firm’s name — The Hongkong and Shanghai Banking Corporation (HSBC) — it’s no surprise to learn that 55% of its revenue is generated in Asia. Therefore, the ongoing property crisis in China might partly explain why the stock is so cheap.

Investors seem concerned about how much exposure HSBC might have here, as well as the knock-on effects for the wider region. The firm has already set aside $500m for expected loan losses associated with commercial property in China.

However, as a truly global bank, HSBC also generates plenty of profit from the rest of the world. And despite the current issues in China, I have to think Asia is a great place to be operating in long term. It is still the world’s fastest-growing region.

Seizing opportunities

Bagging an 8% yield like this would go a long way to helping me reach my 7.5% yield for £1,500 in annual dividends.

Looking forward, however, I highly doubt investors will always be able to bag these types of high dividends. Eventually, the dark clouds will part and sunnier economic times will shine through.

By then, of course, it’ll probably be too late. Markets will rise and quality stocks like HSBC won’t be offering such lip-smacking passive income. So I’ve been striking while the iron is hot.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Ben McPoland has positions in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings and Tesco Plc. 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

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »