2 high-yield shares that could generate £1,000 in passive income from a £20,000 investment

Considering building a passive income? Ken Hall has two high-yield financial services stocks that pay well above the Footsie average.

| 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.

DIVIDEND YIELD text written on a notebook with chart

Image source: Getty Images

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.

For investors looking to build passive income, UK dividend stocks can offer a steady stream of cash.

The FTSE 100 index has an average dividend yield of around 3.5% right now. That’s pretty good, but there are some companies with payouts of 5% or more. That means a £20,000 investment could potentially generate over £1,000 in annual dividends.

Here are two well-known financial services companies that have strong yields and long records of steady dividend payouts.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Pensions and insurance giant

Legal & General (LSE: LGEN) is one of the UK’s biggest financial services firms, specialising in pensions, life insurance, and investment management. It has been a staple of the FTSE 100 for years and is well-known for its solid dividend policy.

The stock is yielding 8.8% as I write on 24 February — significantly above the Footsie average.

Over the past decade, the company has either maintained or increased its dividend. That consistency is a key reason why many income investors follow the stock closely.

In its most recent update, the company reaffirmed its commitment to paying out dividends, while acknowledging challenges including ongoing market volatility and low margins.

The share price has had a mixed performance lately, moving in line with broader financial sector trends. While it has recovered from some lows in 2023, it still remains below pre-pandemic levels.

Steady dividend payer

M&G (LSE: MNG) is another financial services giant. The company has a £5bn market cap and is best known for its investment management and savings products. Like Legal & General, it has built a reputation for steady dividend payouts.

The company currently boasts an even higher yield of 9.5%. That’s one of the highest in the Footsie and means a £20,000 investment could return nearly £2,000 in annual payouts.

However, there are some risks to consider. M&G’s share price fell by more than 10% in 2024, reflecting investor worries about economic conditions and potential pressure on profits.

While the company remains committed to maintaining its dividend, a yield this high sometimes signals uncertainty. Recent share price falls raise the risk of a ‘value trap’ where investors are lured by high yields only to see subsequent dividend cuts.

That being said, M&G has a history of rewarding shareholders, and it has stated that dividends are a key part of its strategy.

If the company can arrest recent outflows and continue to regain its long-term earnings stability, then the strong dividend payouts could continue.

Too good to be true?

When dividend yields climb this high, it’s often worth asking why. The market may be pricing in risks for both companies given they’re exposed to interest rate moves, regulatory changes, and market downturns.

If profits drop, dividends may need to be cut. This is just one reason why portfolio diversification is so important.

Investing a £20,000 lump sum into either of these two companies may be tempting, but I would much rather spread my risk across many shares in the market to avoid concentration risk and large portfolio movements driven by one or two names.

Of course, these are just a couple of high-yield stocks that investors should consider. Others within the Footsie may be able to offer £1,000 in potential annual dividends from the same investment while operating in different sectors and reducing overall portfolio risk.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Ken Hall has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g 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

Tree lined "tunnel" in the English countryside of West Sussex in autumn
Investing Articles

How should I invest to build retirement wealth in a SIPP for a child?

Ben McPoland explains how he plans to adapt his investing strategy in order to more reliably build wealth for his…

Read more »

Content white businesswoman being congratulated by colleagues at her retirement party
Investing Articles

Age 60 and looking for income? 3 FTSE 100 shares yielding 6%+ to consider

Harvey Jones picks out three FTSE 100 shares that offer a juicy passive income stream. Older investors should consider them,…

Read more »

UK money in a Jar on a background
Investing Articles

One of Britain’s best dividend shares is soaring! Time to buy?

Our writer's been looking for shares to buy. One of the biggest UK dividend payers has caught his eye. Could…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

£100, £1,000, or £100,000? Here’s how much it takes to start investing in shares!

Does it take a large sum of money for someone to start investing in the stock market? Our writer doesn't…

Read more »

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Investing Articles

£20,000 in an ISA? Here’s how it could target £1,250 a month in passive income

A Stocks and Shares ISA can be a platform for someone with spare cash to set up a sizeable second…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

3 UK shares I own for easy passive income

Christopher Ruane runs through a diverse trio of UK shares he currently owns, each of which generates passive income in…

Read more »

UK coloured flags waving above large crowd on a stadium sport match.
Investing Articles

Is the UK-US trade deal a brilliant buying opportunity for FTSE 100 shares?

A long-awaited trade deal has been struck between the UK and the US, but how much will FTSE 100 stocks…

Read more »

UK supporters with flag
Investing Articles

3 growth stocks up 27% in a month to consider buying now

Stock market volatility has been a brilliant opportunity to buy growth stocks, which are now rebounding at speed. Harvey Jones…

Read more »