Passive income is what a lot of investors are looking for right now and it’s easy to see why. When generating this powerful form of income, investors typically have a lot more financial flexibility.
The good news is that today, literally anyone can generate passive income by investing in dividend stocks. With that in mind, here’s a look at a simple three-stock portfolio that could potentially generate around £840 in annual income (tax-free if it’s in an ISA) from a total outlay of £10k.
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.
Monster dividends
The first stock in my hypothetical income portfolio is insurance and investment management company Legal & General (LSE: LGEN).
Legal & General has paid out some monster dividends in recent years and analysts expect this trend to continue in the near term.
For 2024, the company is expected to pay out 21.4p per share in dividends to investors. At today’s share price that equates to a yield of 8.5%, meaning a £3,333 investment could generate annual income of around £283.
Now, I’ll point out that analysts’ forecasts aren’t always accurate. And we could see Legal & General reduce its dividend in the years ahead to reinvest capital and generate more long-term growth.
One metric that concerns me a little is the company’s dividend coverage ratio (the ratio of earnings per share to dividends per share). Currently, this isn’t very high, which suggests there’s a chance of a dividend cut.
A near-10% yield
Next, we have savings and investments company M&G (LSE: MNG). This is another company that’s known for paying big dividends. Since it was split from Prudential in 2019, it’s paid out a lot of cash.
For 2024, the payout is expected to be 20.2p per share. At today’s share price, that equates to a yield of 9.7%, meaning a £3,333 investment could deliver annual passive income of around £323.
Like Legal & General, M&G has a relatively low dividend coverage ratio at the moment. So investors shouldn’t bank on dividends remaining at current levels.
If the company’s profits were to decline due to poor conditions in the financial markets, the company may decide to lower its payout and conserve cash.
Income from UK property
The third stock in my hypothetical portfolio is healthcare properties owner Primary Health Properties (LSE: PHP).
This company’s classified as a real estate investment trust (REIT). As a result, it’s required to pay out a large chunk of its profits to its investors in cash.
For 2024, analysts are expecting a payout of 6.9p, which is a yield of 7.1% today. Invest £3,333 and the annual income could be around £236.
The risk with this stock is interest rates. If they were to move higher, the company’s profits and dividends could decline.
It’s looking like the next move for UK interest rates will be down though. We could potentially see a cut in the next few months.
More passive income ideas
Now, I’ll point out that only owning three dividend stocks would be quite risky. If one company’s share price declined significantly, overall returns could be disappointing.
Generally speaking, it’s smart to own at least 15 stocks when investing for income. If you’re looking for more stock ideas, you can find plenty here at The Motley Fool.
