Here’s a simple 5-stock FTSE 100 income portfolio with an 8.1% yield

Considering and investment of £20k in these five FTSE 100 dividend stocks could potentially generate just over £1,600 in annual passive income.

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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.

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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.

IndustryForward yieldAnnual income from £4k
M&GAsset management10.5%£420
Legal & GeneralInsurance9.9%£396
British American TobaccoTobacco9.0%£360
HSBC Banking6.7%£268
GSKPharmaceuticals4.6%£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.

Created with Highcharts 11.4.3British American Tobacco P.l.c. PriceZoom1M3M6MYTD1Y5Y10YALL7 Nov 20197 Nov 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

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.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in British American Tobacco P.l.c., HSBC Holdings, and Legal & General Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., GSK, HSBC Holdings, and M&g 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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