Three ways to generate £10,000 of income

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Kyle is joined by Lee Wild, head of equity strategy, to discuss three hypothetical portfolios intended to provide food for thought as part of income investors’ wider research. Kyle and Lee explain how they’ve structured each portfolio and run through the respective line-ups that aim to generate £10,000 of income in 2025.

To read the £10,000 portfolio articles, follow the links below:

• Lee’s shares portfolio
• Kyle’s funds portfolio
• Kyle’s investment trusts portfolio

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello. I’m Kyle Caldwell, and this is On The Money, a weekly look at how to get the best out of your savings and investments. In this episode, we're going to be running through three hypothetical portfolios we assembled to provide food for thought for investors who are looking to generate an income.

These portfolios, which aims to generate £10,000 of income each year, are purely for editorial purposes, and they aim to offer ideas and inspiration as part of your wider research. Do bear in mind that they’re not financial advice, which we do not provide at interactive investor. Hopefully they are useful in terms of getting people thinking about what they need to think about when building their own income portfolios.

Joining me today is Lee Wild, head of equity strategy at interactive investor. Lee oversees the hypothetical shares portfolio. So, Lee, to start off with, could you add a bit more detail to my brief explanation as to why we put together these portfolios once a year?

Lee Wild, head of equity strategy at interactive investor: Well, the aim of the shares portfolio is to identify the 10 stocks that are already solid dividend players and which are very likely to continue paying generous dividends over the next 12 months. So, if you are an income investor and particularly one who plans to use the income from the portfolio to cover living expenses, then you want companies that are reliable, and you don’t want uncertainty over the payout.

Of course, you can never be a 100% sure, of course, but, you can do a lot to manage the risk. That’s not to say I haven’t included speculative stocks here in the past, but they were only ever a small percentage of the overall portfolio.

Kyle Caldwell: And before we drill into the portfolios, Lee, I think it’s important to get across, I mean, you just mentioned about some of the speculative stocks and that they form a very small percentage of the overall share portfolio. I think it’s important to get across that we're not going all out for income. We’re also wanting to strike an appropriate balance of delivering both capital growth and income over the medium term. And, for me, the medium term is taking a five-year view.

Lee Wild: Well, the first priority is achieving the £10,000 of income and the second is to generate some capital gain, if only to cover inflation. So, I know investors, yes, should take a five-year view. I would with my personal investments, most of them anyway. But my share portfolio is reassessed annually for these purposes, and it’s the £10,000 of income in that calendar year that I’m really wanting. So, it’s not to say these aren’t good stocks for the next five years, they pretty much are. But, prices move, valuations and yields change, so do some of the constituents.

Kyle Caldwell: And also, before we get to the portfolios, I just want to make a few points. So first, there are, of course, various ways to arrange investments to pay an income at retirement. A common approach is to focus primarily on income-generating assets. However, given that average life expectancies are in the mid 80s, a portfolio at retirement arguably also needs exposure to growth-producing assets in order to strike an appropriate balance. Now, when it comes to equity income funds, the good news for investors is that the vast majority try to strike that balance between delivering a certain level of income and also capital growth.

However, it’s also important to bear in mind that some income funds target a high level of income, which can come at the expense of capital growth. And, as ever, it’s a case of looking under the bonnet, understanding the approach that’s being taken, also understanding how the income is being generated, and then take a view on whether you think how the income is being generated is sustainable or not going forward.

However, the other side of the coin is that there’s a potential downside if you opt for the convenience of taking a regular income from income-producing investments. That’s because those who buy funds that focus more on capital growth could benefit from higher overall returns. Now, if you adopt this approach, then you’d need to manually pay yourself the income from the total returns from the funds.

Now, arguably, this is more of a hassle than simply taking, say, the natural yield from an income fund. But I can see why some investors would adopt this approach. Ultimately, for me, it depends on your preference. However, what I would say is that I think mix and match between growth and income makes the most sense, as this will help reduce risk, and will hopefully give your portfolio balance and diversification. Any further thoughts on that, Lee?

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Lee Wild: Well, Kyle, the way I build the equity portfolio hasn’t really changed very much in the past 10 years, and the key for me is diversification. So, spreading your investments across sectors and sometimes risk levels, I think, is obviously a good way to increase the odds of achieving your income target.

I think when I first started the portfolio, I was too focused on higher yields. Now I like to have the best income plays across a range of sectors. Sometimes I’ll drop a sector for one year if I think there are better income opportunities elsewhere, but I don’t want to be too overweight in one particular area of the market.

Luckily, at the moment, we’re blessed with some very high-yielding blue chips for me to choose from.

Kyle Caldwell: Let’s now move on to the portfolios. So, Lee, to start off with could you talk us through how your share portfolio fared in 2024?

Lee Wild: Gladly. It turned out to be a great year. In fact, it achieved the yield of 6.2% equivalent to £10,084 of income. So, the £163,000 it cost to put the portfolio together, that increased to almost a £167,000. So, that’s a return of 2.4%.

The biggest contributor was Lloyds Banking Group (LSE:LLOY). That chipped in nearly £1,400, which is a little more than I expected at the beginning of the portfolio. The share price is up 45%. That gave us a £9,000 profit and made it the star performer in the 2024 portfolio.

Imperial Brands (LSE:IMB) was also responsible for over £1,000 of income. That was up 43%, in terms of share price. So, that was equivalent to a capital gain of £5,600. Difficult in terms of capital returns, but the profit from Lloyds and Imperial offset losses elsewhere.

Kyle Caldwell: So, that's the 2024 portfolio, let’s now move to your choices, Lee, for 2025. And before Lee runs through them, I just want to flag to our listeners that we’ve put links to editorial articles that outline each portfolio [at the top of this article]. So do check those links out. In those editorial articles, there’s a table that shows the portfolio weightings and the respective yields. So, Lee, what changes have you made for 2025?

Lee Wild: Well, there are only three changes, and none are particularly radical, I don’t think. Imperial Brands, as I’ve said, was a star performer of the 2024 portfolio. The share price surge does mean the prospective yield has shrunk to a comparatively modest 6%, though. So, I felt I could do better elsewhere. If I’m looking to stay within the tobacco sector, where yields are historically stronger, you have to look at British American Tobacco (LSE:BATS). That yields 7.4%, and and trades on a similarly modest valuation to Imperial, so the extra income’s valuable there. So, BAT got the nod this time.

Morgan Advanced Materials (LSE:MGAM). I used it for the first time in 2024. It had a good debut, but generated the yield I hoped for. So ended the year with only a modest capital loss. So, yeah, good year. But the 4.4%, income on offer is not really attractive enough to book a place in what I think is really a competitive portfolio for 25.

So, I’ve gone back to a sector that I haven’t included since 2022, and that’s the oil sector. So, BP (LSE:BP.) I chose, that’s valued on a par with Shell (LSE:SHEL). BP is expected to generate a yield of about 5.9% this year versus just 4.4% at Shell. So, yeah, BP gets the nod there.

Hardest decision I had to make was really among the banks. I guess what’s happened since I picked the portfolio has proved that out, really. Lloyds Bank repaid the faith. I put it in last year, up 45% in share price terms, yielded almost 7%, assigned 12% of the portfolio to Lloyds last year, so that proved to be a good move. And there aren’t many in the UK bank sector that can really compete with it, or couldn’t last year, at least, on yield. So, it would have been easy to keep it in. But, yeah, a difficult decision from an income perspective. Only two choices, really, Lloyds or HSBC Holdings (LSE:HSBA).

Lloyds was predicted to yield after the big share price gains from last year was predicted to yield 5.5%, HSBC, 6.1%. So, with the motor finance litigation overhanging Lloyds, I thought let’s go for the superior yield and pick HSBC. Obviously, Lloyds has done very well since in terms of share price terms. But, obviously, you have to make decisions based on the facts you have at the time. So, I’m happy with the portfolio for 25.

Kyle Caldwell: So, you've run through the ins and the outs. Could you briefly run through the other seven companies that have retained their places in the portfolio?

Lee Wild: Yep. Well, it costs a £152,000 to put the basket of 10 shares together. If everything goes to plan, there'll be a 6.8% yield, and that will get us over £10,000 of income. I've built in a little bit of contingency to cover risk this year given some high yielders have lowered the cost of the portfolio.

So, my income pick from the pharmas, GSK (LSE:GSK), yields 4.7%. The stock's trading at the bottom of its long-term range of roughly between £13 to £18, and makes it one to own in in this portfolio. Obviously, AstraZeneca (LSE:AZN) is the only other option in the UK pharma sector, and Astra yields very little. So, it's GSK or nothing, I'm afraid.

National Grid (LSE:NG.) has promised to grow the payout in line with annual CPI inflation, plus housing costs, so CPIH. So, the forecast yield's about 4.7% still. That's competitive in the sector.

I wanted to maintain exposure to UK insurers, as I have done since the very first portfolio that I oversaw in 2015. So, I'm gonna stick with Legal & General Group (LSE:LGEN) this year, as I have done every year since 2021. It's been a steady contributor, and it's tipped to yield at over 9% in the year ahead. Aviva (LSE:AV.), again, has done really well, and it seems odd to say a forward yield of 7% isn't good enough, but it doesn't compare with L&G at the moment. So, L&G gets the nod.

M&G Ordinary Shares (LSE:MNG), they've been great for me for years in this portfolio, so it'd be foolish to get rid of them. People, again, for years have doubted that they'll maintain the dividend, and they have. So, I've got every faith in management. The yield of over 10% is a no-brainer for me.

The mining sector, last year's pick still looks like the one to own, Rio Tinto Registered Shares (LSE:RIO). Sector-leading yield of 7.1% and possibility of capital upside. We'll see how the year goes, but miners have done OK recently.

Sainsbury (J) (LSE:SBRY)'s did a job for me last year and generated solid annual income. Yields 5.5% at the moment, much more than Tesco (LSE:TSCO). So, I wanted to include Sainsbury's there as well.

And then there's Taylor Wimpey (LSE:TW.). It's the highest-yielding house builder. Still plenty of recovery potential, I think. Sector's off the lows at least, but could do with a better economic outlook and lower rates. Looks like we're having to wait longer than we'd like for lower borrowing costs, but I'm sure they will come. So the share price, I think, factors in quite a lot of bad news already.

The new Labour government's developed a plan to boost the number of homes we build each year to 300,000. So, over the life of the government, [it] looks like a hugely ambitious target. I'm not sure too many people think they'll do it, but the sentiment's there. So, that's gotta be a positive. A yield for Taylor Wimpey of over 8% and recovery potential guaranteed it a place in this year's portfolio.

Kyle Caldwell: As you mentioned, Lee, the yield of the portfolio is 6.8%. Now for the two portfolios I've put together, the overall yields are a fair bit lower. So therefore, you would need a higher hypothetical amount. So for the funds' portfolio, the yield's 4.26%. So you'd need £235,000 to try and generate £10,000 of income.

Whereas for the investment trust portfolio, the yield is 5.26%. That means you'd need a £190,000 to try and generate £10,000 of income. With funds, I do find it particularly challenging to build a portfolio with big yield without potentially compromising on capital growth.

Whereas with investment trusts, I do find it easier to generate a yield of over 5%, and be content with the prospect for both capital growth and income over the medium term.

So, in terms of 2024 performance, I'm pleased to say that for the funds' portfolio, the income target was achieved with £10,152 worth of income generated. The overall total return, which of course includes dividends reinvested, was 10%.

Now for the investment trust portfolio, annoyingly, the 2024 line-up fell slightly short of the target. So, £9,921 of income was generated. However, I feel the reason why it didn't hit the target was completely out of my hands. So, Balanced Commercial Property delisted in mid November after being taken over by US private assets firm Starwood.

So, it generated less income than expected due to the fact that it was taken over. However, it had a very strong year in terms of share price total returns. So, it was up just under 40% until its delisting in 2024. So, in theory, some of those gains could have been used to make up for that shortfall. And in terms of overall total returns for the investment trust portfolio, it returned 9.4% in 2024.

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Lee Wild: Look, Kyle, I think you're unlucky with that falling just short of the £10,000 income target for the trusts' portfolio. I mean delistings are something that can happen with investing and can't be predicted. You weren't to know. As you already mentioned, investors could have taken some profits from Balanced Commercial Property's overall returns in 2024 ahead of the delisting. That more than makes up for the slight shortfall in income.

So, Kyle, moving on to the 2025 portfolios, given the delisting, you had a hole to fill for the trusts' portfolio. Did you replace Balanced Commercial Property with another property investment trust?

Kyle Caldwell: I didn't fill the property void, Lee, but I did give it a lot of thought. One of the main contenders to replace Balanced Commercial Property was TR Property Ord (LSE:TRY). So, when I'm putting together these portfolios, I'm looking at interactive investor's Super 60 list, which is a range of funds that are endorsed by our fund analysts in conjunction with Morningstar, the data firm.

However, I am cautious on the outlook for property as an asset class. I feel there's a lot of rhetoric at the moment about economic growth being sluggish, and a lot of fund managers are talking about inflation potentially surprising on the upside. So, this could result in there being fewer interest rate cuts than expected this year, heading into 2025. The Bank of England indicated that four interest rate cuts would be on the cards, so I'd sooner wait until next year to see whether those interest rate cuts materialise, which is why I didn't replace like-for-like property exposure.

Now, as well as waving goodbye to Balanced Commercial Property, I also removed JPMorgan Claverhouse Ord (LSE:JCH). So, this is a UK equity income investment trust. It's been a real “Steady Eddie” over the years. It's a consistent dividend payer. It's one of the Association of Investment Companies' (AIC) “dividend heroes”, having consistently increased its dividend for decades. However, in 2024, there was a manager change. Its longstanding fund manager of 12 years, William Meaden, departed. I felt this departure was quite unexpected. And, in my opinion, I felt the succession planning could have been smoother. So due to that, I decided to remove JPMorgan Claverhouse.

In its place, I chose Dunedin Income Growth Ord (LSE:DIG). This is managed by Rebecca Maclean and Ben Ritchie, and it's managed by Aberdeen. I've interviewed the fund managers before. I like the approach, it has a sustainable investment approach. It can hold up to 25% in overseas stocks. So, I feel that the approach gives the portfolio something different.

So, following those changes, the 2025 portfolio results there being nine investment trusts, down from 10 last year.

I'm just going to very briefly run through the other choices. Something I want to get across is that when I'm looking for candidates for the portfolios, as mentioned, I'm looking to see which funds our analysts like that are in the Super 60 list. But I'm also taking a view on the investment approach, strategy, whether the fund manager has been in place for a long time, whether there's been a repeatable track record of performance, and whether, over the long term, income has been delivered and consistently generated.

So, the other choices, for UK equity income, that comprises 45% of the portfolio, there's 15% in City of London Ord (LSE:CTY) Investment Trust, 10% in Merchants Trust Ord (LSE:MRCH), 10% in Dunedin Income Growth Ord (LSE:DIG), and 10% in Diverse Income Trust Ord (LSE:DIVI).

For global overseas income, I selected JPMorgan Global Growth & Income Ord (LSE:JGGI). I gave that a 20% weighting. I also chose Henderson International Income Ord (LSE:HINT). I gave that a 10% weighting, and I do feel that that gives the portfolio something different as its investment approach and style is sufficiently different from JPMorgan Global Growth & Income. I allocated 5% to Utilico Emerging Markets Ord (LSE:UEM).

For bond exposure, I selected TwentyFour Income Ord (LSE:TFIF), which is a 10% weighting. And, for specialist, I picked Greencoat UK Wind (LSE:UKW), which is popular among interactive investor customers. It aims to increase its dividend in line with RPI inflation, and since it was launched over a decade ago, it has achieved this every single year.

Lee Wild: Look, Kyle, I know you put a lot of thought into these portfolios. So, I did feel for you when it was announced just a few days after they were published that two of the trusts that you picked are potentially going to merge in a couple of months' time?

Kyle Caldwell: Yeah, it was unfortunate timing, Lee. It would have been better if that announcement was made before I published the article, as I then would have potentially made a change. So, if given the green light by shareholders, Henderson International Income's assets, which are around £390 million, they'll be rolled into JPMorgan Global Growth and Income. And if given the green light, the current fund managers, the investment objective and dividend policy of JPMorgan Global Growth and Income, will remain the same.

As I mentioned, I do feel like they are sufficiently different from one another in terms of investment style and approach. So, I was a little bit surprised by this proposed combination, but at the same time, feel it makes sense. I feel like there will be increased consolidation within the investment trust industry because wealth managers increasingly only invest in investment trusts that have a sufficient size. I heard some commentators now say that it's around the £500 million mark. So, I do feel like with investment trusts, the big trusts will likely get bigger in the years to come, and there will be more mergers.

Another thing that's happened, Lee, is that the longstanding fund manager of Greencoat UK Wind, Stephen Lilley, he's departing next month. Again, this was unexpected. And as I've mentioned, I do like to see fund managers have long tenures, and this is one of the reasons why I picked it. So, I'll keep that in mind next year when I review the portfolio and review how it's performed.

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Lee Wild: OK. With the funds' portfolio for 2025, I also noticed you've reduced the number of holdings, so down from 12 to 10. So, which ones did you remove, and did you introduce any new ones?

Kyle Caldwell: I just removed two. I didn't introduce any new ones. So, I readjusted the weightings for the existing holdings. So, the two I removed are Janus Henderson UK Responsible Income and FTF ClearBridge Global Infrastructure Incomev.

The main reason why I removed the Janus Henderson fund is because at the time I reviewed the portfolio, it had underperformed the average UK equity income fund over one, three, and five years. So, as a result of that, I decided to slim down the number of UK equity income funds to those that I have higher conviction in.

Now, with the infrastructure fund, this was a tactical decision to take advantage of the attractive yields that you can now achieve on bonds, and also the potential price returns for bonds given the prices should appreciate when interest rates are cut. So, I took the view that I'd sooner seek out greater bond exposure, particularly given the fact that you can obtain yields of around 4.5% to 5% on the lowest-risk areas of the bond market, such as gilts and money market funds. I think given the fact that interest rates are where they are, this now means there's less incentive to invest in some alternative income assets such as infrastructure.

So, as mentioned, I didn't introduce any new holdings. I allocated 25% to UK equity income, I chose Artemis Income I Acc, Man Income, and I also picked Vanguard FTSE UK Equity Income Index fund, which is a passive fund.

I also picked, for global overseas income, Fidelity Global Dividend W Acc. This has a quite a low yield, but I've picked this for both income and capital growth. And then high-yielding options that I picked were Vanguard FTSE All World High Dividend Yield ETF USDAcc GBP (LSE:VHYG), which, as the name suggests, is a passive fund. I also picked Guinness Asian Equity Income.

And then for the rest of the portfolio, 50%, I picked Artemis Monthly Distribution. I gave that a 20% weighting. This is a balanced fund, and it holds 60% in shares, 40% in bonds.

And then the remaining 30% was split across three bond funds, which are Jupiter Strategic Bond, Royal London Global Bond Opportunities, and Royal London Short Term Money Market fund.

Lee Wild: The portfolios are different in terms of asset allocation. So, you've selected more bond exposure for the fund portfolio versus the investment trust portfolio. What's the reason?

Kyle Caldwell: That's a good point, Lee. It's mainly because with investment trusts, there's not many bonds-focused investment trusts. So, the fact that there was slim pickings, I didn't want to feel compromised picking between such a small number. However, it will be interesting to see how both portfolios perform against each other in 2025, as they are quite different in terms of asset allocation.

It will be interesting to see if bonds, as well as hopefully delivering that good level of income, also do produce, hopefully, an attractive overall total return in 2025.

I think as well for investment trusts, it'll be interesting to see whether the sector as a whole has a better year and whether discounts start to decline. Investment trust discounts have been stubbornly wide for a couple of years now, and the average investment trust discount is in the mid teens. Now, one of the investment trusts I picked, Greencoat UK Wind, has a big discount, it's over 20%. And if that discount does reduce, that will improve the share price total return.

Of course, it could widen further and prove to be a headwind. And, of course, time will tell on that. And time will also tell in terms of how all three hypothetical portfolios have fared by the time we do review them, Lee, which will be late January 2026.

So, Lee, we'll have to have you back on the podcast this time next year to discuss how they've performed and see how you've changed your line-up, and how I've changed my lineup for 2026.

Lee Wild: Look forward to it.

Kyle Caldwell: My thanks to Lee, and thank you for listening to this episode of On the Money. If you enjoyed it, please follow the show in your podcast app and do tell a friend about it. And if you get a chance, leave us a review or a rating in your podcast app too. You can join the conversation, ask questions, tell us what you'd like us to talk about via email on OTM@ii.co.uk. 

And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the interactive investor website, ii.co.uk. And I'll see you next week.

On The Money is an interactive investor (ii) podcast. For more investment news and ideas, visit www.ii.co.uk/stock-market-news.