Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year
Investors with £20,000 to spare could generate lots of passive income. And if the funds were invested using a Stocks and Shares ISA, any dividends and capital gains would remain tax-free.
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.
Personally, I prefer to invest in UK shares. The companies — and the markets in which they operate — are more familiar to me. History tells us that the US stock market has consistently outperformed the FTSE 100. But I feel more comfortable investing closer to home. And even though some of the Footsie’s peers have done better, I think an average annual return (with dividends reinvested) of 12.6% — from 2020 to 2024 — is decent enough. After all, if this was maintained for 25 years, it would turn £20,000 into £194,294.
Over the same period, the more domestically focussed FTSE 250 had an average annual return of 8.1%. Although not as good as the FTSE 100, it’s better than the interest rate on savings accounts.
The other thing I like about UK equities is that they generally pay higher dividends than, for example, their American counterparts. The Footsie’s currently yielding 3.5% and the FTSE 250’s offering a return of 3.65%.
However, by shopping around, I think it’s possible to do better than this.
A handful of shares
Here’s an example of a five-stock portfolio that’s currently yielding 7.5%.
| Stock | Index | Current yield (%) |
|---|---|---|
| Harbour Energy | FTSE 250 | 12.2 |
| Legal & General | FTSE 100 | 8.5 |
| Supermarket Income REIT | FTSE 250 | 7.9 |
| Persimmon | FTSE 100 | 4.8 |
| Lloyds Banking Group | FTSE 100 | 4.3 |
| Total | 7.5 |
The figures are based on dividends paid over the past 12 months. Investing £4,000 in each of these stocks would ensure the annual ISA limit is fully utilised. It could also generate passive income of £1,500 a year, although it’s important to remember there are never any guarantees.
Some would claim that a portfolio comprising five stocks isn’t sufficiently diversified. However, the ones in the table cover a wide range of industries so there would be some protection. Personally, I think the ideal number of shares depends on the overall size of the portfolio.
Energy income
The highest-yielding in the table is Harbour Energy (LSE:HBR). However, some of this impressive return has been caused by a significant fall in the oil and gas producer’s share price, rather than an increase in dividend. Since the middle of January, largely as a result of a weaker oil price, the value of its shares has tanked over 45%.
But I don’t think the group’s current stock market valuation reflects the size and scale of its operations.
In September 2024, the company completed the transformational acquisition of the upstream assets of Wintershall Dea. The deal means it’s now producing over 75% more and it’s no longer entirely reliant on the North Sea for its income. Also, it’s significantly lowered its cost of production. Yet the group’s market cap is only £100m higher than before the merger was concluded.
This probably reflects concerns that its earnings from the UK Continental Shelf are subject to a corporation tax rate of 78%. And a softer oil price means its profit and free cash flow are likely to be lower than anticipated. This could put pressure on the dividend.
But acknowledging these challenges, I think the stock’s positioned to do well over the next few years. Despite the move to net zero, the demand for hydrocarbons continues to rise. And energy price volatility is not a new phenomenon.
On balance, investors could consider holding it as part of a diversified portfolio of high-yielding shares.
The post Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year appeared first on The Motley Fool UK.
Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:
We think earning passive income has never been easier
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!
More reading
- This 13%-yielding FTSE 250 share looks dirt cheap
- I own the FTSE 350’s highest-yielding dividend share. So why am I concerned?
- Why are investors ignoring this FTSE 250 dividend stock with a near-10% yield?
James Beard has positions in Harbour Energy Plc and Persimmon Plc. The Motley Fool UK has recommended Lloyds Banking Group 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.
