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Creating a stocks portfolio from scratch is an incredibly rewarding experience. I’ve done it and I know plenty of others who have done the same. Different investors start out with different aims. Let’s say someone wanted to begin to build a portfolio based around generating passive income. Here’s how I’d go about it, starting today.
The rough structure
For the purpose of this portfolio, I’d look to invest 80% of my funds in income-paying stocks. The other 20% would go into growth stocks.
Generating income from the 80% of dividend stocks should be fairly straightforward. Owning shares in the companies makes me eligible for a split of the profits via the dividends paid out. Sure, the dividend per share changes from year to year. Yet if I hold a mix of companies, I’d expect to receive some form of payment most months.
For the growth stocks, it isn’t quite as simple. My thinking here is that over time, the stocks I pick should have appreciated in value. From that point of view, I should be able to trim profits on a yearly basis and use this as banked income.
Thinking about the potential yield
Given that the base rate here in the UK is 5.25%, I want to try and get at least a similar yield (if not higher) on my income portfolio.
With an average dividend yield of 3.81%, the FTSE 100 has plenty of options to choose from for dividend stocks. Instead of buying a tracker, I’d actively select firms that have an above-average yield. Good examples that I’d include would be Glencore (yield of 7.27%) and HSBC (5.81%).
For growth stocks, it’s harder to forecast a yield. This is because not only could the stock underperform my expectations, but its price could also fall and prevent me from generating any profits!
With that being said, I think I could still achieve a growth rate of 10% per year by including stocks like Greggs (86%) and 4imprint (145%). In brackets are the share price returns over the past three years.
Putting all of this together, I’d be aiming for a yield of 7.5% for the full portfolio.
Getting to £10k of income
As a beginner, I might have a lump sum ready to invest. If I had £133k, then this could generate me the £10k each year without much further action.
However, if I don’t have the cash then I’d have to build up to this over time. For example, I could set aside £500 each month and reinvest any dividends I get paid. After 13 years, I’d reach the target goal of making £10k in income.
There are lots of variables and risks to consider. Yet ultimately if I set up the portfolio with a sound strategy to begin with, it’ll sure take out plenty of stress further down the line.
