Setting a substantial passive income goal and figuring out how to reach it can be rewarding. Once the revenue hopefully starts flowing in, it could also be financially rewarding.
If I wanted to aim for £5,000 of passive income next year – and hopefully in the years beyond – I would do so by investing equally in the five UK stocks below. Their average return is 7.3%, so to reach my annual goal of £5,000 in passive income, I would need to invest around £68,500. If I wanted to invest a lower amount, I could still aim for the same average return by buying these five stocks for my portfolio. But with less money invested, my passive income would also be reduced accordingly.
Legal and general
Insurer and financial services group Legal and general (LSE: LGEN) has a yield of 6.5%. There are other financial services groups with higher returns, but there are several reasons why I would choose Legal & General specifically for my portfolio. First, it proved to be attached to its dividend. For example, during the pandemic, when many peers suspended payouts, Legal & General retained its dividend. I also think that the marketing concept of the company “Inclusive capitalism” shows that it is thinking seriously about how to maintain its commercial relevance even after more than 180 years in business.
Dividend history is not necessarily a guide to what will happen in the future. Although the company has established a plan to increase its payout each year in future years, dividends are never guaranteed. Legal & General faces risks. Its marketing push is a reminder of how competitive the financial services market is. Fierce competition could mean lower profit margins in the future than in the past.
But I think the company also has significant strengths. Its famous multicolored umbrella logo has given the company a lasting reputation in the minds of millions of potential customers. Its investment management activity also contributes to diversifying its activities, offering it broader growth opportunities than some pure play insurers.
It takes a lot of time and money to build an electricity distribution network. This is why these networks often have no competition. This can be good for profits, especially since electricity is an essential part of everyday life and demand tends to be robust.
British utility national grid is a dividend stock that I would add to my portfolio to benefit from it. It can be rewarding in terms of passive income, offering a 4.5% return. National Grid has been a consistent dividend collector in recent years. There are risks, such as a shift in electricity consumption patterns as hybrid work takes hold. This could require capital expenditure to update the network, which would reduce profits. But I see National Grid as a classic utility stock, with long-term business potential and an attractive dividend.
Investment manager M&G (LSE: MNG) sometimes seems unloved by investors. M&G’s share price has risen 8% over the past year, in line with the FTSE 100. But its dividend yield is 8.9%, which is unusually high for a member of the FTSE 100 .
Does this mean that investors doubt the sustainability of the dividend? After all, the company has clearly stated that it plans to maintain or increase it – and returns close to 9% are rare. Or could it be that the city has never fully understood the M&G business since its split from Prudential several years ago to become a self-contained listed company?
I think both things could be true. Although management does not plan to cut the dividend, payouts are never guaranteed. M&G faces risks, including the risk that customer exits will harm its revenues and profits. In the first half, such outflows continued in the retail asset management division. But the institutional arm recorded net inflows and reached a record amount of assets under management. The scale of his assets under management and the established reputation of his M&G make me think it can be a lucrative business in the long run. Whether it’s popular or not, I like M&G’s revenue-generating potential. I would consider adding it to my passive income portfolio.
Passive Income Ideas in Tobacco
Tobacco stocks are common passive income ideas. This is partly because of the high yields on offer. But while tobacco stocks outperform most of the market, they still underperform stocks in sectors such as mining. So why do I consider tobacco stocks some of my most rewarding passive income ideas? This is because of the economic characteristics of the tobacco industry. Production costs are low. But the addictive nature of the product and the potency of premium tobacco brands means the products can be sold for a hefty profit. Unlike mining, for example, the demand for tobacco tends to be quite stable from year to year.
British American Tobacco
In the longer term, however, the demand picture becomes less clear. Cigarette consumption is in structural decline in most developed markets. This will reduce the income of manufacturers. Pricing power may offset some of the decline in earnings, but in the long run, significantly lower revenues will affect earnings at some point.
Iucky strikes maker British American Tobacco actually saw its revenue increase last year, in part due to rising prices. I believe its vast cigarette business will generate substantial cash flow for years to come. But it is also expanding into new product categories in an attempt to diversify its business. It expects these new areas to become profitable in 2025. This month it increased its dividend as it has done every year for more than 20 years. The current yield is 6.6%. I would be happy to keep it in my passive income portfolio.
Income and Growth Venture Capital Trust
The fifth choice for my portfolio would be Income and Growth Venture Capital Trust. The trust invests in a portfolio of promising companies, many of which are not publicly traded.
This allows me to be exposed to a wide range of emerging companies. If trust managers choose their investments well, they can generate income that is passed on to shareholders in the form of dividends. It might not happen: Many start-ups fail and it could hurt the trust’s profits. But when it works, it can be rewarding. Currently, the trust yields 9.8%. It would make a very tasty addition to my passive income portfolio.
Post 5 stocks I would buy now to aim for £5,000 of passive income next year appeared first on The Motley Fool UK.
Christopher Ruane owns shares of British American Tobacco. The Motley Fool UK recommended British American Tobacco and Prudential. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.
Motley Fool United Kingdom 2022