Income investing portfolio: an example of how to create a killer passive income

Following on from my recent article on investing for monthly income, I wanted to take things a little further and create an equities based income investing portfolio which could help produce passive income and I think not erode your capital in the process. The last part is important because it seems this is a key risk – even in a rising market but especially now in a tricky economic situation. You don’t want to create passive income at the expense of hopefully, at least some, share price growth. This is why I won’t be including any oil or tobacco in this portfolio as I don’t believe in their long term futures.

This example portfolio is for patient long term investors (so at least five years). It’s designed to provide a sustainable rising income that can compound and be reinvested into more shares over time. As such there will be a mixture of high yielding shares in there, along with dividend growth shares and some stocks with more of a growth focus. Belvoir comes into that camp as it’ll be reinstating its dividend.

The portfolio is designed with covid-19 and the resulting dividend cuts and suspensions in mind. It also overlaps in places with shares I own, and which I have conviction in, but otherwise is my honest opinion on shares which have a profitable future and can create a passive income.

My example investing portfolio

Company Ticker Reason for including
Scottish Investment Trust SCIN Exposure to gold miners and a contrarian investor
Admiral ADM Well run international insurance company which also has comparison websites
National Grid NG Demand for its services won’t go away making it a dependable dividend payer
PZ Cussons PZC Strong portfolio of brands and Nick Train bought into the shares last year
Polar Capital POLR Asset light and scalable business model, with corresponding high margins
City of London Investment Trust CTY A dividend hero investment trust with a high yield and diversification
BAE Systems BAE Demand for defence won’t go away making it a dependable dividend payer and it’s not regulated
Severn Trent SVT Demand for water won’t go away making it a dependable dividend payer with high visibility of future earnings
Belvoir Lettings BLV Dividend paying AIM share which could provide a higher level of growth for the portfolio
Schroder Oriental Income SOI Gives the portfolio a decent yield and exposure to a fast growing region of the world

The portfolio goes in order of my level of conviction, so my biggest position would be in the Scottish Investment Trust and the smallest in Schroder Oriental Income. Depending on how you split the portfolio positions depends on the yield you get but if you invested equally in all of them you’d have a yield in the region of 4.2%.

The portfolio spans industries and geographies creating diversification, even within what is a concentrated portfolio, to which you may well want to add more shares and other investments such as bonds. Especially if you wanted less risk. If you were concerned about risk you may want to include more trusts and move the portfolio away from the UK, given the FTSE 100’s underperformance versus the US stock market.

That being said, I have confidence all these companies will be able to keep paying dividends. I think over time they could create a good passive income and perhaps add capital growth on top.

While a passive income is great, remember don’t let it come at the expense of your capital. Ideally, you’d want to combine both growth and income and avoid value traps. These are high yielding shares where the share price is falling. They will give you the income but not the growth and often these companies eventually need to cut their dividend payouts to recover after overextending themselves. You want to avoid these types of high yielding companies.

How to create passive income from shares

When it comes to creating passive income from shares these are the things I think you should be considering:

  • What is the dividend yield? And is it too high versus similar companies and at risk of being cut?
  • What is the dividend cover?
  • Has the company been able to grow the dividend and how consistent is the dividend growth?
  • Does the company or industry face major structural challenges that could impact on the share price?
  • What growth opportunities are there for the company?

On top of these questions, I’d conduct a SWOT analysis. Once you’ve done this, you’ll be well on your way to being able to find shares which could help you create a killer passive income.

Please remember I’m not in a position to say you should buy any share. You should do your own research. This article is intended to be informative, as opposed to investment advice.

Please also note I own shares in National Grid and the Scottish Investment Trust. Subsequent to this article first being published I have bought shares in Polar Capital.

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