Here’s a simple 5-stock passive income portfolio with an 8.7% yield

With these five UK dividend shares, investors could start earning a £435 passive income each year from a £5,000 investment. But is it a good idea?

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Building a high-yield passive income portfolio using UK stocks continues to be easy in 2024. The stock market has enjoyed a significant rally over the last two months, with the FTSE 100 delivering a total return of 12.9%. Yet even after strong price appreciation, there remain countless lucrative income opportunities for investors to capitalise on.

Generating an 8.7%-yielding portfolio

Looking at some of the highest-yielding large-cap companies on the London Stock Exchange, investors can quickly whip together a diversified portfolio. Even with only £5,000 to invest, that’s more than enough to get the ball rolling and unlock a £435 passive income stream on an equal-weighted basis.

CompanyIndustryDividend YieldPassive Income
Phoenix Group HoldingsLife Insurance10.9%£109
M&GInvestment Banking10.2%£102
British American TobaccoTobacco8.6%£86
Taylor WimpeyHomebuilding7.0%£70
Rio Tinto (LSE:RIO)Metals & Mining6.8%£68
8.7%£435

Needless to say, earning an 8.7% yield’s far better than what even the best savings accounts currently offer. And when paired with the additional potential gains from a rising stock price, the total return could be even greater, perhaps even outpacing the UK’s flagship index!

Passive income stocks: our picks

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Portfolio vs the FTSE 100

As fantastic as the prospect of unlocking a £435 passive income stream today sounds, it sadly comes with a catch. Simply chasing the biggest yields doesn’t always deliver the best results, even when maintaining industry diversification.

Company5-Year Share Price Gain/Loss5-Year Total Return
Phoenix Group Holdings-32.1%+4.9%
M&G-14.1%+34.2%
British American Tobacco-4.2%+39.2%
Taylor Wimpey-19.8%+8.3%
Rio Tinto+19.1%+60.4%
-10.2%+29.4%

From a share price perspective, these five companies have been pretty disappointing, with the exception of mining giant Rio Tinto. With a total -10.2% return, this portfolio significantly underperformed the FTSE 100’s +10.5% increase over the same period.

When introducing dividends into the mix, things seem much better at a 29.4% total gain. But once again, that still falls short of the FTSE 100’s 32.3% total return. In other words, investors would have been better off just investing in a FTSE 100 index fund.

Digging deeper

If it wasn’t for Rio Tinto, the performance of this passive income portfolio would be significantly worse. So what actually drove its over 60% total gain these past five years? While economies of scale and financial strength certainly play a role, most of the firm’s gargantuan gains actually came from external factors.

Global supply chain disruptions and commodity price inflation enabled this business to pay out enormous dividends to investors in 2021. But since then, the price of metals such as iron and aluminium have essentially been slashed in half, as has Rio Tinto’s dividend. And continued weakness among the firm’s flagship metal products could drag shareholder payouts down even further.

All of this is to say that just because a company offers a high dividend yield today doesn’t automatically make it a good investment. And blindly chasing passive income will likely lead to an underperforming portfolio.

Instead, investors need to carefully examine each candidate to determine whether dividends can be maintained and expanded in the long run, even if that means starting at a lower initial yield.

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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.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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