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How I’d use £10,000 to target a £760 passive income

Various denominations of notes in a pile

The average dividend yield from the FTSE 100 is 3.7%. That would give me a £370 passive income each year from a £10,000 investment. That would be useful, but I’m pretty sure I can do better than this.

By investing in individual high dividend yield shares, I think I can target a £760 annual dividend income from £10,000. That’s equivalent to a 7.6% yield — double the FTSE 100 average.

Here, I’ll explain how this could work — and which UK shares I’d buy to put my passive income strategy into action.

Is 7.6% realistic?

I’ll start with a disclaimer. Dividends are never guaranteed and share prices can fall. For this reason, investing in shares for income shouldn’t be seen as a replacement for cash savings.

Having said that, in my experience, the UK market is quite a good place to hunt for sustainable high dividend yields.

In my opinion, the 10 companies I’ve listed below are all likely to maintain and possibly increase their dividends over the next year.

Company Forecast dividend yield
Direct Line Insurance Group 10.3%
Barratt Developments 9.9%
Liontrust Asset Management 8.6%
Phoenix Group 8.4%
Imperial Brands 7.4%
Vodafone 7.2%
Vesuvius 6.4%
Dunelm Group 6.3%
Landsec 6.1%
DS Smith 6.0%
Average 7.6%

These shares offer an average forecast yield of 7.6% at current prices. That’s equivalent to a passive income of £760 per year from an investment of £10,000.

Why are they so cheap?

All of these companies are FTSE 100 or FTSE 250 members. They’re profitable and pay dividends that should be sustainable, in my view.

However, I can see some risks. Insurer Direct Line and fund manager Liontrust are facing tough market conditions at the moment. Housebuilder Barratt has also reported a slowdown in new sales.

If conditions continue to worsen, earnings at these companies could fall over the next year. That might reduce the affordability of their dividends. If performance ends up being worse than expected, dividend cuts might be needed.

Looking further down the list, I think Vodafone and tobacco group Imperial Brands have high yields because investors question their ability to deliver long-term growth. However, I think both companies are in decent health financially. I don’t expect either to cut their dividend.

Industrial group Vesuvius could suffer in a global recession, while homewares retailer Dunelm is facing the risk of a slump in UK consumer spending.

Passive income: getting started

There are always risks when buying shares. These have to be balanced against the potential rewards available from a successful investment.

I already own some of the shares on this list and I’d be happy to buy the remainder. However, I probably wouldn’t rely on a portfolio of just 10 shares. That’s a little too concentrated for me.

Instead, I’d use these 10 stocks as a starting point and aim to expand my portfolio to 15-20 shares over time. This extra diversification should reduce the impact of any future dividend cuts and give me access to additional growth opportunities.

The post How I’d use £10,000 to target a £760 passive income appeared first on The Motley Fool UK.

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Roland Head has positions in DS Smith, Direct Line Insurance, Dunelm Group, and Imperial Brands. The Motley Fool UK has recommended DS Smith, Imperial Brands, Landsec, Liontrust Asset Management, and Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.