Building a portfolio of UK stocks to generate passive income is a worthwhile investment strategy. Yet the success depends on two things. First, the stocks that are included in the portfolio. Second, how realistic is the size of the income that’s being targeted. In order to aim for £10k annually, here are the four shares I’d include.
Hot shots from banking
Two of my four ideas come from UK banks. More specifically, I’m referring to NatWest Group (dividend yield of 5.23%) and HSBC (5.48%).
In large part due to the sharp increase in interest rates over the past year, UK banks have been able to grow profits. For example, HSBC has been able to grow revenue by 64% from Q1 2022 to Q1 2023. During this period, profit before tax has risen by $8.7bn to $12.9bn.
The net interest margin has grown for both banks over the past year. This refers to the difference in the rate charged on loans versus what gets paid on deposits.
Given that I don’t see any central bank rate cuts any time soon, I feel this enhanced profitability should aid continued generous dividend payments to shareholders.
A risk is that both banks are exposed to UK retail customers. If we get a recession this year, loan defaults could be a thorn in the side financially.
Starting to get back into property
The second sector with two ideas is property. I’ve noted down British Land (6.42%) and Land Securities Group (6.17%).
Between the two companies, they own some prime UK space. This includes the Piccadilly Lights and Paddington Central, both in London.
Both trusts have struggled over the past year, with a wobbly property market and higher leverage costs when it comes to borrowing. Yet the share price fall (both down at least 18% in the past year) has helped to push up the dividend yield, which is a silver lining.
The property market is a cyclical sector, and at the moment we’re in a trough. Yet as a good long-term investor, it makes sense to buy these stocks now. I could wait until a growth or boom period, but I’ll likely have missed the boat on share price gains.
Putting the numbers together
To get to £10k in annual second income, I need to regularly invest in the four ideas. There’s no guarantee that future dividends will continue to be paid. Yet by having a few different ideas (that I can broaden out if I want to), it limits the negative impact of one stock struggling.
Let’s say I park £150 in each stock, each month. Assuming that in the future I can invest at the same dividend yield, I’ll reach my goal in 15 years.
This might seem a long time, but £10k is a sizeable amount of money! To be able to enjoy this kind of passive income, it logically needs time to build up to that level.
