Building a dividend stock portfolio that’s capable of generating a substantial amount of passive income has never been easier. Today, there are heaps of shares on the London Stock Exchange that offer high yields.
Here, I’m going to put together a hypothetical five-stock portfolio with a 7.5% yield. With a £10k investment, this kind of portfolio could potentially generate income of around £750 per year. And I think all of these stocks are worth considering.
Generating passive income
In the table below, I’ve listed five popular dividend stocks along with their forward-looking yields. I’ve also shown how much income each stock could generate from a £2,000 investment.
| Stock | Industry | Forward-looking yield | Annual income from a £2k investment |
| HSBC | Banking | 7.3% | £146 |
| Legal & General | Insurance | 9.9% | £198 |
| National Grid | Gas & electricity | 4.7% | £94 |
| British American Tobacco | Tobacco | 9.3% | £186 |
| Vodafone | Telecoms | 6.1% | £122 |
The yields from the stocks vary. But if I was to put £2,000 into each of these five stocks, I could be looking at total annual income of around £750.
That’s a decent amount of income from a £10k investment. That’s far higher than I could get from a savings account.
What’s the catch?
There are a few things I need to point out here.
First, the yield figures I’ve put in the table above are just forecasts from analysts. They may not be accurate so they shouldn’t be relied upon (note that yields change slightly every day depending on share price movements).
And dividends are never guaranteed. Companies can cut or reduce them at any time.
Vodafone is one company that has reduced its payout in recent years. Further cuts cannot be ruled out.
A second issue to be aware of is that every one of these companies faces its own risks. And these could lead to share price losses (which could offset gains from dividend income).
Take British American Tobacco (LSE: BATS), for example. It’s facing a challenging backdrop today due to the worldwide crackdown from governments on tobacco and vaping products.
Given the backdrop, it’s not generating a lot of revenue growth. This could put pressure on earnings and dividends in the years ahead.
Another issue here is the increasing focus on ESG/sustainability within the investment community. This could impact sentiment towards the stock and limit share price gains.
Now, I don’t want to sound too bearish on British American Tobacco. Because there’s plenty to like about the stock, including a very low valuation.
It’s worth pointing out that this year, the company is forecast to generate revenue of more than £26bn. So, there’s clearly still demand for its products.
It’s important to understand however, that it does face risks and could see share price weakness in the future. This applies to all the stocks I’ve mentioned.
More stocks needed
Given that each company has its own risks, five stocks is not really enough to build a rock-solid income portfolio. If I was serious about building a proper dividend stock portfolio, I’d want to own at least 15-20 stocks.
The good news is that it’s not hard to find other high-yielders in the UK market. If anyone is looking for investment ideas, they can find plenty right here at The Motley Fool.
