It’s never been easier to build a high-quality dividend portfolio. Right now, there are loads of FTSE 100 shares offering passive income opportunities.
Here, I’m going to lay out a five-stock portfolio that yields 8.1%. This means £20k invested equally across these picks in a Stocks and Shares ISA could bag me around £1,628 a year in tax-free passive income.
Sounds good to me. Let’s dive straight in.
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.
The portfolio
Below, I’ve listed three stocks from my own income portfolio and two that I’d consider if I were starting from scratch. The reason I don’t hold M&G and GSK is because I already own other shares in each respective sector (financial services and healthcare), and I don’t want to risk unbalancing my portfolio.
| Industry | Forward yield | Annual income from £4k | |
| M&G | Asset management | 10.5% | £420 |
| Legal & General | Insurance | 9.9% | £396 |
| British American Tobacco | Tobacco | 9.0% | £360 |
| HSBC | Banking | 6.7% | £268 |
| GSK | Pharmaceuticals | 4.6% | £184 |
| £1,628 |
As we can see, the forward-looking yields vary quite a bit, but they add up to a very attractive 8.1% yield. That would give me annual income of about £1,628 — far higher than just sitting in cash.
Some things to bear in mind
Now, it’s important to remember that these are just forecast yields. We won’t know for certain until the boards of the companies actually declare what they plan to pay shareholders next year (if anything at all).
Plus, each firm has its own individual risks. HSBC and Legal & General both have massive investment portfolios, so are also exposed to the vagaries of market movements. Earnings can be volatile.
M&G’s asset management division continues to deliver strong investment performance for its clients. As of 30 June, 66% of its mutual funds ranked in the top two performance quartiles over five years.
Yet with the S&P 500 up 35% in just one year, more clients might pull their money out and opt for a straightforward passive investing strategy. That’s always a risk for M&G.
Meanwhile, GSK is a vaccine maker at a time when Donald Trump has just won the US election. Reports say anti-vaccine advocate Robert F Kennedy Jr may potentially get a say on which jabs get approved. So that adds a bit of uncertainty.
Still a cash cow
The main risk with British American Tobacco (LSE: BATS) is more straightforward to grasp. Fewer people are smoking in the West, while vaping products are also coming under greater regulatory scrutiny.
Yet according to a 2021 paper published in The Lancet, there’ll be more than 1bn smokers globally by 2050. This projection factors in population growth and ageing, as well a decline in the overall smoking population. So cigarettes aren’t expected to disappear overnight.
Indeed, over the next five years, British American Tobacco still expects to generate approximately £40bn in free cash flow. If so, that should be enough to keep paying very attractive dividends.
The stock trades for a bargain-basement 7.3 times forecast earnings, while offering that meaty 9% forward yield.
A strong foundation
I reckon these five shares could provide a rock-solid foundation for a dividend portfolio. But I wouldn’t sleep well if I only had this many in my portfolio. I’d want at least 10-15 due to the risk of dividend cuts.
As mentioned though, the UK market is packed with income stocks of all shapes and sizes. There are investment ideas available from various sources, including here at The Motley Fool.
