10 shares to give you a £10,000 annual income in 2024

After 14 years of either declining or historically low interest rates, UK savers finally had something to cheer at the end of 2021. Rates started rising and didn’t stop until they reached 5.25% in August last year. But while higher savings rates are good news for those seeking risk-free returns, sky-high inflation and a buoyant stock market meant the best opportunities for both income and growth in 2023 were found elsewhere.

Britain’s flagship FTSE 100 index grew less than 4% on a share price basis last year. Despite making a record high and briefly exceeding 8,000 for the first time in February, it spent most of the year between 7,350 and 7,750.

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However, the total return, which includes dividends, was 7.9%. The FTSE 250 index managed 8%. Those diversifying their portfolios with overseas assets would have done even better. America’s Nasdaq tech index delivered almost 54% on the same basis, Japan grew 28% and European bourses were up by a fifth.

Best rates on easy access savings accounts last year, according to our monthly income screener column, were 5.3%, and 5.5% for easy access cash ISAs. You could have got 6.2% on a one-year fixed rate bond.

But with CPI annual inflation anywhere between 10.4% early in 2023 and 3.9% in November, every percentage point was crucial to generating a positive real-terms return. Now, in 2024, savers will be forced to make some big decisions if interest rates do start to fall in a few months’ time, as expected.

Income portfolio performance in 2023

The objective is to generate at least £10,000 of annual dividend income over the 12 months, using a diversified basket of 10 shares. Ideally, the value of the portfolio would also be higher at the end of the year than at the start; but income is the priority.

When I put the portfolio together a year ago, I anticipated a dividend yield of 6.4%. I wanted a diverse basket of shares, so sacrificed yield in some cases. But there were still some chunky prospective dividends in there, and the likes of Legal & General Group (LSE:LGEN), British American Tobacco (LSE:BATS) and M&G Ordinary Shares (LSE:MNG) delivered the goods. Over the year, my 10 stocks generated £10,660 of income for a yield of 6.8%.

Biggest contributors to the excess income were Sainsbury (J) (LSE:SBRY)’s with 24% more than I’d expected, Taylor Wimpey (LSE:TW.) (17%) and SSE (LSE:SSE) (12%). Diversified Energy Co (LSE:DEC) was the biggest positive surprise, generating an extra 27%. However, its share price was also the biggest negative in the portfolio.

Having invested £158,000 in the portfolio to generate that level of income, I ended the year with £147,461 for a decline of 6.7% and total return of 0.1%. Diversified accounted for £6,900 of the lost capital.

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Normally, an investor would not churn their portfolio at the end of each calendar year but, as I point out each time, this portfolio starts the year with a clean slate. It means the exercise remains relevant for anyone who shows an interest, whether existing investor or newbie. That also means there will be some changes in the line-up for 2024. Here are the stocks that stay, those that don’t and some new entries.

The shares that stay in 2024

Six companies in the 2023 portfolio are kept for this year’s basket of 10 income stocks. Not all of them had a spectacular 2023, but each delivered a generous dividend and provided valuable diversification, while four of them also chipped in a market-beating capital gain.

Last year I switched out of Persimmon (LSE:PSN) and into Taylor Wimpey. That proved to be a wise decision, the latter’s share price ending the 12 months up 23% and yielding 8.2%. The payout was deemed safer than housebuilder peers because its dividend policy is not based on earnings cover targets. Instead, the company promises to return 7.5% of net asset value, giving investors “increased certainty of a reliable income stream throughout the cycle.” That’s good enough for me, especially as a likely decline in interest rates this year should support the housing sector.

Sainsbury’s also did me proud, my estimate of a 4% dividend yield proving conservative. A 5% payout generated almost £1,000 for the portfolio, while the share price ended the year up 8%. There’s not much to choose between Sainsbury’s and Tesco (LSE:TSCO) in terms of share performance, but the former has a much better yield.

I’m keeping M&G in the portfolio for a fourth year because it continues to deliver the goods. A steady share price performance over the past few years and one of the best blue-chip yields around make it impossible to reject the asset manager. Yes, plenty have been predicting a dividend cut for years, but the company repeats that its policy of “delivering stable or growing dividends to our shareholders remains unchanged.”

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GSK (LSE:GSK) had been ever present in these income portfolios since launch before losing its place in 2021 following the decision to ‘rebase’ its dividend. The payout still isn’t great, but diversification into the defensive pharma sector made up for last year’s modest prospective yield of 4%. As well as making a solid contribution to the income strategy, the share price grew by 10%. I’m sticking with the drug giant this year for the same reasons.

There’s wasn’t much to choose between the high street banks last year, confirmed by their share price performance over the 12 months. None covered themselves in glory, despite much higher interest rates, and Lloyds Banking Group (LSE:LLOY) shares fell 19%. But it’s a well-run company and has avoided any shocks, unlike some peers. Its shares have spent most of the past three years in a 40-50p range, and there’s little to suggest they’ll be worth significantly less in 12 months’ time, so I’m locking in a 6.6% yield.

Legal & General shares were pretty much flat in 2023, but a 7.7% dividend yield made a welcome contribution toward our £10k target. A near two-year downtrend appeared to end in November as the insurer’s shares rallied with the rest of the market. L&G shares sit near an 11-month high and offers an 8% yield and, having outperformed rival Aviva (LSE:AV.) last year on both share price and dividend, albeit marginally, I’m sticking with L&G in 2024. 

Heading for the exit

If six stocks stay, it must mean four stocks have been shown the door. Three are punished for an underperforming share price and deteriorating outlook, but utility SSE gets the boot for committing the cardinal sin – cutting the dividend. This was flagged by the company before I picked it for the 2023 portfolio, but there was still an attractive yield to be had before the payout was rebased for the year to 31 March 2024. There are better yields than SSE’s 3.5% elsewhere in the sector.

British American Tobacco (LSE:BATS)’s three-year run in the portfolio ends now. It’s always delivered the dividend it promised, but the capital depreciation has been significant (25% in 2023). The shares are cheap on a price/earnings basis compared to the FTSE 100 average, but I just don’t see enough potential for significant recovery in the near term.   

Since launch, I’ve always set aside one or two spots in the portfolio for more speculative income plays, typically with higher yields. I don’t invest as much in them as I do the blue-chips, just in case. Often it pays off, and when it doesn’t, the lower investment and diversification within the portfolio protects both income and capital.

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Diversified Energy had been in the portfolio for three consecutive years because strong free cash flow meant regular and very generous dividends – it yielded over 9% in each of the first two years and 12.6% in 2023. But a lot’s happened over the past year - US gas prices have declined, the company listed its shares in New York after a 20 for 1 share consolidation, and now there are concerns in the US regarding its well retirement and emissions information.

A 57% slump in the share price means the already high-yielding stock now offers a dividend yield of around 30%. Understandably, alarm bells are ringing loud, and despite still impressive free cash flow, the payout looks vulnerable. It seems an irresponsible and unnecessary risk for this year’s portfolio.

Sylvania Platinum Ltd (LSE:SLP)’s inclusion in the portfolio has been brief, despite achieving a 7.6% dividend yield. It all seemed rosy when I explained the rationale a year ago - running platinum group metal (PGM) processing plants across South Africa's lucrative Bushveld complex, owning exciting mining rights, high margins and return on capital, reasonably priced shares, and a generous dividend.

But October’s annual results were poorly received, and the share price decline has accelerated in recent weeks. Platinum and palladium prices both fell in 2023, and Sylvania shares suffered a 42% capital loss amid an uncertain year ahead for the industry.  

Four more for 2024

Energy company SSE has generated a healthy annual income above 5% for the past two years, but after deciding to rebase the dividend for 2023/24, the forecast yield drops to 3.5%. That's why I'm going back to National Grid (LSE:NG.), a defensive stock which offers an inflation-linked dividend and attractive yield of 5.7%. It’s a well-run business, and some analysts believe the market is overlooking long-term asset growth in UK electricity networks and US networks.

Both Imperial Brands (LSE:IMB) and British American Tobacco are among the highest yielders in the FTSE 350, but while BAT’s three-year stint in this income portfolio started well, the capital loss in each of the past two years, particularly the 30% slump in 2023, has been disappointing. Imperial fell too, yes, but the decline in the last calendar year was a more modest 12.8%. And while both share prices had followed similar trends, a divergence became obvious last October, widening during December when BAT said it would write down the value of its acquired US cigarette brands by £25 billion.

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And for the two more speculative spots, I’ve dialled down the risk and brought in Rio Tinto Registered Shares (LSE:RIO). The mining heavyweight had been in this income portfolio for three years until I switched it out last year when fewer special dividends meant a much lower prospective yield.

While there are still plenty of issues around demand and production overhanging the industry, Rio has promised “total cash returns to shareholders over the longer term to be in a range of 40% to 60% of underlying earnings in aggregate through the cycle.”

Morgan Advanced Materials (LSE:MGAM) is the smallest company in this year’s portfolio at £800 million, but it yields over 4% and offers exposure to the industrials sector. Morgan manufactures advanced carbon and ceramic materials used in wind farms and plane engines. 

At third-quarter results in November, the company maintained its forecast for annual organic revenue growth of 2-4%. It also expects "good growth" in the first half of 2024 and further margin expansion following recent sequential improvements. The dividend is both generous and well covered by earnings, while the valuation is also attractive at 11 times prospective earnings.

Source: SharePad, analyst estimates. All figures as at 24 January 2024.

ii Head of Editorial Lee Wild own shares in Diversified Energy Company.