It’s never been easier to generate passive income from the stock market. There are dozens of trading apps about nowadays, many of them offering a wide range of investing choices. Better still, some don’t charge any stock trading fees.
So, how much passive income could an investor starting out realistically expect to generate from a portfolio? Let’s find out.
A £10k portfolio
The first thing to point out is that a Stocks and Shares ISA account shields any dividends received from income tax. While the annual limit is £20,000, even investing half that amount is enough to build up sizeable passive income, as we’ll see.
Should you invest £1,000 in British American Tobacco right now?
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The average dividend yield from FTSE 100 stocks right now is around 3.5%. This means an investor could invest £10,000 in an index tracker than holds all 100 stocks and hope to achieve annual dividend income of £350.
An alternative route would be to build a bespoke portfolio of individual shares. This approach carries higher potential risk, as individual companies face unique challenges that require consideration, and their dividends are not guaranteed.
However, the risk might be worth it due to the potential for higher income. In other words, it is possible to earn a far higher rate of passive income by investing in individual dividend stocks offering far higher yields.
A stock to consider
I currently have four ultra-high-yield FTSE 100 stocks in my income portfolio. The table below lists their forecast dividend yields for 2025.
| Forward yield | |
|---|---|
| Legal & General | 9.3% |
| British American Tobacco | 7.8% |
| Aviva | 7.3% |
| HSBC | 6.3% |
The average yield here is 7.7%, meaning an investor who puts £2,500 into each stock should receive £770 a year in dividends. That’s more than double the FTSE 100 average!
Of course, I’m simplifying things, as dividend payments rarely stay the same every year. Ideally, they should increase, but that isn’t certain. Aviva, for example, cut its payout in 2019 (though it’s paid a rising dividend every year since).
Global bank HSBC and insurers Legal & General and Aviva are all financial stocks. Therefore, the other may stick out like a sore thumb. Why do I own the tobacco stock? Well, when I first invested in it back in March, the stock was yielding above 10% on a forward-looking basis. That proved far too tempting, despite the genuine risk of falling cigarette sales.
Since then though, the share price has increased by 33%, lowering the yield in the process. Nevertheless, l think the stock still offers me solid value, trading at a low price-to-earnings multiple of around 7.9.
British American Tobacco is the world’s second-largest tobacco company by volume, operating in more than 180 countries. It owns cigarette labels Lucky Strike and Camel, as well as next-generation brands like Vuse (e-cigarettes), Glo (heated tobacco), and Velo (nicotine pouches). I don’t expect these nicotine products to disappear worldwide for some time.
Indeed, the Trump administration recently withdrew a plan to ban menthol cigarettes in the US. The company owns Newport, the leading menthol brand in America. Meanwhile, its Velo-branded nicotine pouch products are growing strongly.
Regular investing
To build up sizeable passive income, it’s going to take time. However, if someone invested £500 a month on top of a £10k sum, and reinvested dividends along the way, they’d end up with £319,077 after 20 years.
That portfolio would then be generating £24,568 in dividends each year, assuming the same 7.7% yield.
