10 shares to give you a £10,000 annual income in 2022

There are lots of big dividend payers out there, but our head of equity strategy wants to strike a balance between glamour yields and reliability this year.

A grim 2020 for investors is now a distant memory, especially following a prosperous 2021 which saw our £10,000 annual income portfolio retrieve all the previous year’s losses and a lot more.

The objective is to generate an annual dividend income of £10,000 or more over the next 12 months, using a diversified basket of shares capable of actually delivering the level of dividend we anticipate. This time, six of the 10 constituents exceeded our expectations. Only two fell short, but just by a few pounds.

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The £160,000 invested in the portfolio generated a dividend income of £10,550, giving a yield of 6.59%. Star of the show was Rio Tinto, which yielded an incredible 11.7%, almost twice as much as anticipated. As well as the ordinary dividends, the mining giant was able to pay two special dividends as demand from China doubled iron ore prices.

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A 15.4% capital return was the icing on the cake, adding more than £24,600 to the pot, thanks in part to a 41% rally at oil major BP. Only two stocks in this well-diversified basket of shares failed to generate a positive share price return in 2021.

Added together, the portfolio generated over £35,000 of capital and income in the year to 11 January 2022 for a total return of 22%. That compares with a more modest 14.9% for the FTSE 100 and a fraction less for the FTSE All-Share index. Only the French Cac 40, Mumbai, S&P 500 and Nasdaq 100 did better.

Our faith in some more speculative income stocks was repaid in spades. We also proved that, in some circumstances, you can invest in stocks yielding over 9% and actually get paid out while also generating a substantial capital gain.

The portfolio’s objective is to repeat this performance every year. Because we start with a clean slate each time, some of last year’s winners will not make it into the team for 2022. Here are the stocks that keep their place and the hot replacements for the ones that don’t.

Star performers in the 2021 income portfolio were…

Commodities starred in 2021, BP (LSE:BP.) providing the biggest boost to the portfolio’s capital and Rio Tinto (LSE:RIO) contributing most income. But it was a group effort from this diversified basket of shares, and there were few negatives of note.

Only Rio and Diversified Energy Company (LSE:DEC) (previously Diversified Gas & Oil) registered a share price decline, down 11% and 12% respectively, and no one stock yielded less than 4.6%.

Picking the three speculative income plays I’d used in some separate analysis for interactive investor proved sensible. As well as Diversified Energy’s 9.4% yield, commercial property trust AEW UK REIT (LSE:AEWU) paid out 9.7% and M&G (LSE:MNG) 9.8%. It was a double-whammy for AEW, whose shares also rallied 38%.

For a dull supermarket stock, Sainsbury’s (LSE:SBRY) delivered the goods. A 4.6% dividend yield plus 22% capital gain from the country’s second-largest grocer was exactly what we asked for.

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Life insurer Legal & General (LSE:LGEN) doubled up, with an 18% share price boost plus 6.9% dividend payout. Meanwhile, British American Tobacco’s (LSE:BATS) priced edged up 7% to accompany a knockout 7.9% yield.  Our two utilities – National Grid (LSE:NG.) and United Utilities (LSE:UU.) – did what utilities do in terms of income, yielding a steady 5.8% and 4.6% respectively and providing over £2,000 of income for the year.

Who stays and who goes?

I’ve made some changes to this year’s portfolio. BP stays because the sector offers diversification, and its yield just pips that of Shell.

Within the insurance sector, L&G couldn’t have done more for us. I had considered swapping it out because its current forward yield of 6.4% is eclipsed by an insurer in the non-life space. However, given it yields more than rival Aviva (LSE:AV.), and it’s not easy finding generous well-covered dividends, I’m keeping L&G for exposure to the life market.

Two of the super high yielders - reliable cash generator Diversified Energy and M&G – are picked again for 2022. But fellow mega-dividend stock AEW UK REIT has already had a good run, so I say thank you and goodbye.

United Utilities and National Grid head for the exit as their yields sit too far below 5%, especially when energy company and previous portfolio constituent SSE (LSE:SSE) offers much more.

Sainsbury’s looks to remain in a strong position despite the ultra-competitive nature of the grocery sector. A yield of 3.6% won’t set the pulse racing, but it does provide diversification and income stability while we take risks elsewhere in the portfolio.

Finally, and after looking at all the alternatives in the mining space, I’ve decided Rio Tinto is impossible to replace. Fourth-quarter production was mixed, although guidance for iron ore in 2022 matched expectations. And hopes for increased demand from China this year and concerns about supply from Australia have pushed up iron ore prices to multi-month highs.

Rio’s dividend policy states total cash returns to shareholders over the longer term will likely be 40-60% of underlying earnings in aggregate through the cycle. The ex-dividend dates currently in the diary are 10 March for the final dividend of 2021 and 11 August for the interim payout for the financial year to June 2022.

New for 2022

Not much jumps out in the utilities sector, certainly among the water companies. In terms of eye-catching dividend yields, it’s SSE that stands out with a 5.2% yield. The company, which featured in this portfolio series between 2017 and 2019, puts National Grid at 4.6% and United Utilities at 4.1% in the shade.

The company has said it remains committed to its five-year dividend plan that runs to March 2023, so expect growth in line with RPI inflation until then. The share price should also be underpinned by SSE's organic offshore wind pipeline and disposal programme. Involvement of activist investor Elliott Advisors should also keep management on its toes.

My eye is drawn to non-life insurer Direct Line Insurance (LSE:DLG), which offers an irresistible 8%-plus prospective dividend yield. The shares have risen over the past year, but underperformed life giants L&G and Aviva. There is likely caution around new regulatory pricing rules, but motor insurance could improve in 2022 and there’s optimism around the transformation programme underway. That leads some analysts to predict a narrowing of the pricing gap to rival Admiral.

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The third of this year's new picks is the country's largest housebuilder, Persimmon (LSE:PSN). Its shares have suffered a dip in popularity in recent months amid concerns about rising taxes, higher interest rates and the end of Help to Buy.

However, higher build completions and average sale prices brightened its recent trading update. Not only are Persimmon shares better value than they were 10 months ago, but the company promises to pay back 125p to shareholders in 2022, plus surplus capital which will be returned separately in the Spring.

 £10,000 income portfolio 2022