Like most investors, I love receiving cash dividends. Assuming there isn’t a cancellation, which is always possible, the money just flows into my brokerage account.
This happens when I’m going about my daily business or even sleeping. It’s the very definition of passive income.
My favourite hunting ground for dividend stocks is the London Stock Exchange because of its cheap valuations and high yields. So this is where I’d invest a £20,000 ISA today to aim for an annual income of £1,200.
Passive income generation
Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.
John D Rockefeller
To generate £1,200 in passive income, I’d need to invest in stocks with an average dividend yield of 6%. This would make it a high-yield portfolio as the average FTSE All-Share yield stands at around 3.6% today.
I reckon now is actually a great time to invest because there’s been a degree of market volatility in recent weeks. And one consequence of lower share prices is higher dividend yields, which improves my income prospects.
Now, while that sounds great in theory, sometimes a high dividend yield can be a warning that a payout isn’t sustainable. It could be cut or even cancelled. So combing the market for the very highest-paying stocks I can find is unlikely to be the best strategy.
Solid contenders
Personally, I’d aim for income stocks from different sectors with a range of yields.
Here’s a selection of shares that I either already own in my portfolio or I’m looking to invest in soon.
| Stock | Dividend Yield | Industry |
| BlackRock World Mining Trust | 6.1% | Metals and mining |
| Henderson Far East Income | 9.5% | Diversified investments |
| Legal & General | 8.2% | Financial services |
| National Grid | 4.5% | Utilities |
| Renewables Infrastructure Group | 5.4% | Renewable energy |
If I invested an equal amount into each stock, the aggregate yield would be slightly over 6%.
One share I don’t own here is Henderson Far East Income. This is an investment company that manages a portfolio made up of dividend-paying stocks in Asia.
I’m not familiar with a couple of the top holdings, so I’m researching further. Especially as that monstrous 9.5% yield could indicate there’s above-average risk here. But Asia is the fastest-growing region in the world, so I’m very interested.
As for the rest, National Grid is a regulated monopoly operating energy transmission networks. That makes the dividend safer than most at present, but there are some politicians calling for it to be taken back into public ownership. That’s a risk here.
Renewables Infrastructure Group owns and operates solar and wind farms. But the new government windfall tax levied on energy producers may limit how much it can grow its earnings and dividend in the near term.
Meanwhile, BlackRock World Mining Trust is exposed to compelling long-term trends like digital transformation. But the mining sector it invests in is cyclical and can be volatile.
Legal & General is vulnerable to customers cutting back on financial services, such as asset management solutions. Though after nearly 200 years in business, L&G has weathered the odd storm or two.
I know dividends are never guaranteed, but these are all well-run companies with excellent track records of paying and increasing them. As such, they form a core part of my own income portfolio.
