Diversification is a crucial consideration for passive income investors. Since companies can cut or halt dividend payments at any moment, it’s important not to have all your eggs in one basket.
There’s no magic rule about the minimum number of dividend stocks required for a diversified portfolio. However, 10 shares or more is a good starting point. At this level of variety, there’s reduced exposure to the specific risks associated with any single company.
With that in mind, here’s a sample Stocks and Shares ISA portfolio investors could consider building to aim for £1,380 in annual passive income.
High-yield dividend shares
To reach this dividend income goal from a £20k ISA, investors would need a 6.9% yield across their holdings. Given that the FTSE 100 average is only 3.6%, buying high-yield stocks will be required. A simple index tracker would fall well short.
To illustrate the kinds of stocks I’m talking about, investing £2,000 in each of the UK companies listed below would hit the passive income target. I’ve selected this sample portfolio from FTSE 100 and FTSE 250 shares. In the spirit of diversification, it covers different areas of the market, from banking to pharmaceuticals, media to water, and beyond.
| Stock | Dividend yield |
|---|---|
| Aviva | 6.63% |
| BP | 6.51% |
| British American Tobacco | 7.52% |
| GSK | 4.48% |
| HSBC | 6.17% |
| ITV | 6.35% |
| Johnson Matthey | 6.35% |
| Legal & General | 8.55% |
| Primary Health Properties | 6.95% |
| Sainsbury’s | 5.18% |
| Severn Trent | 4.30% |
I reckon it’s a credible mix of quality dividend stocks, giving prospective investors plenty to chew over. Furthermore, I didn’t blindly pick the highest yields I could find, which is a common mistake for novice stock pickers.
Buying shares based on their yields alone overlooks other essential qualities, such as dividend cover, distribution histories, and the fundamental health of the business behind the headline yield figure.
That’s not to say these firms pay sure-fire dividends. There’s no such thing. But it’s a nice snapshot of top UK dividend shares to consider buying, and I hold some myself.
A lesser-known FTSE 250 stock
One of my choices that may be less familiar to readers is Primary Health Properties (LSE:PHP). With 29 consecutive years of dividend increases to its name and a yield just shy of 7%, this real estate investment trust (REIT) should capture the attention of passive income investors.
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The company’s portfolio is concentrated in long-term leasehold and freehold interests in modern primary healthcare facilities. A recent £22.6bn funding increase for NHS England is a big tailwind for the REIT, considering 89% of its rent roll comes from government bodies. Coupled with anticipated interest rate cuts, macro conditions look encouraging for share price growth.
I also like the steady upward trajectory of Primary Health Properties’ financial results. Net rental income and adjusted earnings per share have improved year on year for at least five years. Growth opportunities in Ireland are another attractive point. The Emerald Isle is the company’s “preferred area of investment” today.
Admittedly, the balance sheet could be in better shape. Net debt of £1.32bn looks uncomfortably high measured against a market cap of £1.35bn. This raises questions over the dividend’s sustainability. Nonetheless, on balance, I think favourable market fundamentals mean the future looks bright for this income stock.
