£100,000 is a big chunk of cash. If I had this sort of money to invest in the stock market today, could I generate a reliable passive income of £10,000 per year?
I decided to challenge myself to see if I could build a simple stock portfolio to meet this goal. Here’s what I found…
The 10% challenge
Producing a £10,000 income from £100,000 means generating an annual return of 10%. That’s a pretty high bar — the average dividend yield in the FTSE 100 is about 4%.
However, falling share prices over the last year have left some dividend stocks with very high yields.
At the time of writing, I can find 10 FTSE 100 stocks with forecast dividend yields of 8%, or more. If I expand my search to include FTSE 250 shares, that total rises to 20.
If I expand my search to include all FTSE 100 and FTSE 250 stocks with a dividend yield over 6%, I’m left with 47 shares to choose from. I’m going to use these as the starting point for my £10k income challenge.
How I’d build a high-yield portfolio
It’s worth remembering that falling share prices mean higher dividend yields, as long as the dividend isn’t cut. For an income investor like me — who is still buying shares — a stock market slump can be good news.
For my £10k income challenge portfolio, I’m going to select 10 shares. If I decided to build the portfolio for real, I’d invest an equal amount of cash in each stock.
One key focus for me is identifying dividends that are sustainable, even during a recession. However, I’m not going to worry too much about growth. As I’m targeting maximum income today, I’m happy to sacrifice some future income growth.
My 10% passive income portfolio
To choose the stocks for this portfolio, I simply sorted a list of FTSE 350 stocks by their 2023 forecast dividend yields, with the highest first.
I then worked down the list, checking each stock for dividend safety and selecting a mix of companies from different sectors. Here are the 10 stocks I chose with the average dividend yield adding up to 8.5%.
- Diversified Energy Company: 11.4%
- M&G: 10.5%
- Direct Line Insurance: 10.3%
- Taylor Wimpey: 8.8%
- Glencore: 8.5%
- Vodafone: 8.3%
- British American Tobacco: 7.5%
- TP ICAP: 7.2%
- ITV: 6.6%
- Land Securities: 6.0%
If I invested £100,000 in these 10 stocks today, I’d expect to get a dividend income of around £8,500 in 2023 — equivalent to an 8.5% return.
This is slightly less than my 10%, or £10,000 target, but I think there’s room for growth in some of these payouts over the coming years.
It’s worth remembering that high dividend yields can sometimes be a warning that problems lie ahead. I believe these companies’ dividends all look reasonably safe. But if I’m wrong then some of these payouts could fall.
To manage this risk, I’d probably aim to expand the portfolio to hold 15-20 stocks, over time. This would reduce the impact of any future problems at individual companies.
I don’t have £100,000 to invest in shares right now. But I’m using the ideas I’ve discussed today to gradually build an income portfolio, adding a little more each month.
