I plan to continue building a passive income portfolio in 2022, following a process I started this year. I also plan to invest around £50 a week for a total contribution of roughly £217 a month.
In addition to building a significant nest egg, this should help me hit my income target, which is above £5,000 a year.
To hit this target, I estimate I will need a savings pot of around £100,000. As I already have approximately 20% of this balance, I estimate it will take me roughly 12 years to hit the target. That is assuming an average annual rate of return of 8%, which is roughly in line with the 10-year FTSE All-Share historical return rate. However, I am well aware that I should never use past performance to guide future potential.
Assuming I hit this target, I plan to switch away from growth investments to income investments. And there are at least five income investments in the FTSE 100 I would be happy to buy for my portfolio today.
Passive income investments
As I noted above, I am targeting an annual passive income of £5,000. With a savings pot of £100,000, this suggests I will need to find shares with an average dividend yield of 5%.
There are plenty of options, although I will be targeting companies with the most sustainable dividend payouts.
When I say ‘sustainable’, I mean that I will be looking for corporations with a high level of dividend cover (earnings per share divided by the annual dividend per share). I am also looking for companies with a high level of revenue visibility. Businesses with long-term contracts are particularly appealing.
With that being the case, I would acquire Aviva and Legal & General for my passive income portfolio. These two pension and life insurance giants have to manage their assets with a long-term outlook. If they do not, they could lose customers’ trust, which would be devastating. At the same time, they have to make sure the dividends they pay are sustainable and within regulatory limits.
Regulatory controls can be a drawback as well as a benefit. Regulators could demand that these companies reduce their dividends to strengthen their balance sheets. This is one risk I will have to keep in mind. After all, all dividends are never guaranteed.
At the time of writing, Aviva and Legal & General support dividend yields of 5% and 6%, respectively.
Consumer brands
I would also buy Britvic and Assura for my income portfolio. Yielding 2.6% and 5%, respectively, both of these companies have a high level of dividend cover.
Assura’s income is backed by rental agreements on healthcare properties, which is fixed and defensive. Britvic owns a portfolio of strong consumer brands with a substantial market share.
In terms of risks, both of these companies are exposed to rising interest rates. These could increase the cost of their debt and reduce profit margins.