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?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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!

Should you invest £1,000 in Tesla right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesla made the list?

See the 6 stocks

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.

Should you invest £1,000 in Tesla right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesla made the list?

See the 6 stocks

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.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »