Forget NS&I rate cuts. I’d build a 5% income portfolio from stocks instead!

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Various denominations of notes in a pile

This year was already proving tough for savers who wanted to earn a decent amount of interest. One by one, in response to the current climate, banks have been slashing their interest rates. Last week, it was NS&I’s turn to cut its savings rates. With it being so difficult to find an account or savings product that pays just 1%, we now need to cast our nets a little wider in the hunt for returns. An obvious place for us to look is the stock market. And the inevitable conclusion is that we need to build an income portfolio.

Remarkably, it’s possible to build a robust income portfolio, even in the middle of a global pandemic. Since the worst of the pandemic back in the spring, companies have slowly been reinstating their dividends. Some never stopped paying them.

The ultimate income portfolio

In fact, it’s possible to build an income portfolio that not only keeps up with inflation, but that satisfies the most demanding income-seeking investors. What’s more, the income on offer is comparable with pre-Covid levels. There may be fewer options available, but they still exist.

The portfolio I’ve come up with contains eight large-cap UK stocks, and has a dividend yield of over 5%. It’s made up of IG Group (dividend yield 5%), Aviva (expected to be 5%+), Airtel Africa (7%), BAE Systems (4%), GlaxoSmithKline (5%), British American Tobacco (7%), M&G (10%), and BP (7%). As well as delivering an impressive income, this portfolio is also pretty-well diversified, covering a range of unrelated market sectors. That should reduce risk. While one sector may suffer, another may step up and outperform.

This income portfolio is also fairy evenly split into defensives and cyclicals. Defensives are likely to outperform if the current situation becomes worse. They’re also more likely to continue paying dividends come what may. Cyclicals on the other hand are better positioned to do well if things improve. There are also a couple of growth companies in there, which are either unaffected or even boosted by the pandemic and subsequent lockdown.

Cheap income stocks

On top of the impressive dividend yield of over 5%, this income portfolio also looks pretty cheap to me. All of these shares are either cheap on a price-to-earnings (P/E) or net asset basis. Aviva and M&G shares are priced at just four times last year’s earnings. BP is priced at a near £20bn discount to its net assets. The value of these shares should protect investors. Their low share prices mean that there’s less room for prices to fall.

Personally, I’d much sooner invest in this income portfolio and earn 5% interest, than put my money in a savings account where it earns less than 1%. Not only do these income stocks produce an impressive dividend, but they also have the potential to deliver share price appreciation. That’s exactly what I expect to happen. In a world of low rates, I think investors will be grabbing any chance they can get to earn these kind of returns, pushing share prices up in the process. And the NS&I savings rate cuts have only strengthened this belief.

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Thomas owns shares of IG Group, BAE Systems and Aviva. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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