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When it comes to generating passive income, few strategies beat the simplicity and effectiveness of dividend investing. That is, owning shares in companies that return a portion of their profits to shareholders. While dividends aren’t guaranteed, the FTSE 100 is packed with firms that have long and reliable track records of payments.
My income portfolio’s foundation is built around three diverse stocks, each well-established and offering an appealing mix of yield and growth potential.
Legal & General Group
Legal & General currently boasts the highest dividend yield on the FTSE 100, sitting at an eye-catching 8.4%. That makes it a strong contender for anyone looking to maximise income from their capital. Over the past few years, the company has also delivered dividend growth averaging 12% annually, reflecting its ability to generate steady profits from its insurance, pensions and asset management services.
Of course, there are risks. A market dip could pressure its investment arm and regulatory changes in the pension space may impact its long-term business model. But Legal & General has proven time and again that it can weather economic storms while still rewarding its shareholders handsomely.
HSBC
As the largest bank in the UK, HSBC (LSE: HSBA) offers a level of stability that few others can match. Its diversified global operations and strong capital base make it one of the more reliable sources of passive income on the FTSE 100. The stock currently yields 5.9%, with a payout ratio of 60% — a healthy level that suggests room for further growth or protection in tougher times.
In fact, HSBC has now grown its dividend for four consecutive years, which is particularly impressive given the challenges the banking sector has faced since the pandemic.
With global economies shaken by trade disruptions, it faces risks from operating in the wider financial landscape. In particular, it’s heavily exposed to geopolitical tensions in Asia, where the bank draws much of its revenue.
Still, its sheer size and longevity make it a solid income pick for me, in my opinion.
Taylor Wimpey
Housebuilders have had a rough ride recently but Taylor Wimpey (LSE: TW.) stands out for its commitment to returning cash to shareholders. The firm currently offers a generous yield of 7.9%, supported by dividend growth of around 20% annually in recent years. That’s not something to ignore if passive income’s the goal.
The concern here lies in the payout ratio, which currently sits at 152% — slightly above the ideal range. This suggests the company is distributing more than it earns, likely dipping into reserves or relying on strong balance sheet management. With the UK housing market facing uncertainty amid interest rate shifts, that could become problematic if earnings weaken.
Still, despite its volatile nature, the housing market is a mainstay with long-term potential. Plus, Taylor Wimpey has a history of navigating cycles and maintaining its dividend, even in slower markets.
A diverse foundation
In my opinion, a small group of reliable shares should form the core of a good passive income portfolio. In this example, each offers something different — high yield, consistent growth or sector diversification — but all provide a way to turn idle cash into regular income.
While no investment is risk-free, I’m comfortable holding these long term and reinvesting the dividends to compound my returns.
