How much do investors need in equities to earn £1,000 a month in passive income? At first sight, the answer might be as low as £150,000.
Earning £1,000 a month from a £150,000 portfolio requires an average dividend yield of 8%. And there are plenty of UK stocks to consider offering that level of return right now.
B&M European Value Retail
One example is B&M European Value Retail (LSE:BME). The stock has an 11% yield (including an annual special dividend), but there are reasons to be concerned about the business at the moment.
For a number of reasons, like-for-like sales have been declining. While the company can look to offset this in the short term by opening more stores, it won’t be able to do this indefinitely.
This means investors should consider whether the current dividend is likely to be sustainable over the long term. And it’s probably worth noting this year’s special dividend was lower than the previous one.
Nonetheless, UK retailers generally have been going through a tough period. And it might be the case that B&M’s going to thrive when things recover, which could make the stock a bargain to think about right now.
Legal & General
Legal & General‘s (LSE:LGEN) an entirely different type of business. But the stock comes with a dividend yield of 8.8% and the company has actually been doing quite well.
In its most recent update, the firm announced an increased dividend and a £500m share buyback. That’s encouraging stuff, but investors should note there are genuine risks to consider.
The nature of life insurance contracts and pension risk transfers makes the stock inherently risky. The possibility of a large and unexpected liability is almost impossible to rule out. I think this uncertainty is why Legal & General shares trade with such a big dividend yield. But passive income investors might want to consider it as a potential portfolio stock.
Taylor Wimpey
A third stock with a dividend yield above 8% is Taylor Wimpey (LSE:TW.). It’s fair to say the UK housebuilder has had a difficult time with rising inflation and high interest rates.
This has been an issue across the industry and the stock now comes with a dividend yield of 8.4% as a result. And the company’s actually more resilient than most when it comes to shareholder returns.
Taylor Wimpey has a policy of distributing cash based on its asset base, rather than its cash flows. That means it tends to maintain its dividend even during cyclical downturns.
In my view, the biggest risk with the stock is an ongoing investigation from the Competition & Markets Authority. But investors should weigh this against a big potential reward on offer.
Diversification
I think an investor absolutely can build a portfolio that generates 8% a year in dividends. And that’s enough to turn £150,000 in cash into £1,000 a year in passive income.
A high dividend yield however, can be a sign that a stock’s risky – even more so than shares are generally. But one way of trying to limit this is by building a diversified portfolio.
Fortunately for investors, the UK has some high-yielding stocks in various different industries. That doesn’t eliminate the risk entirely, but it should hopefully limit it somewhat.
