10 shares to give you a £10,000 annual income in 2025

Tech stocks ruled again in 2024. The Nasdaq Composite tech index returned almost 29% as NVIDIA Corp (NASDAQ:NVDA) briefly became the biggest company on the stock market and other firms rode the AI wave. Donald Trump’s election win also generated extra enthusiasm for bitcoin and cryptocurrencies, while excitement around quantum computing was behind volatility among some of the key players.

A second year of significant upside has been achieved despite interest rates failing to fall as quickly as investors would like amid ongoing concerns about inflation; more recently about what President Trump’s tariff and investment plans might mean for the cost of living.

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The much-maligned UK market finished 2024 mid-table in the league of global stock markets with a 5.7% gain. International Consolidated Airlines Group SA (LSE:IAG), Rolls-Royce Holdings (LSE:RR.) and the high street banks were star performers. And the new calendar year has started well. The FTSE 100 made a record high mid-January and has gone on to trade above 8,700.

Despite stubbornly high borrowing costs in the US, there is still demand for growth stocks, and recent results have been encouraging. Under Trump there is also an expectation that deregulation and increased business activity could drive expansion and investment. The UK government is also focused on boosting economic growth here.

Of course, there are risks which could affect stock market returns in 2025. Trump’s tariff threats risk trade wars with China and possibly the European Union and UK. Interest rates, inflation, conflict and recession are potential headwinds too. In the UK, companies must also deal with increases in employer National Insurance.

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As well as maintaining the capital element of the portfolio and generating the required dividend, I’m keen to limit surprises. This means I’ve gone for safety again in this portfolio for 2025. I’ve largely stuck with constituents in the 2024 edition, with just three changes this time. If the target yield of 6.8% is achieved, it’ll put the best rates available on savings rates in the shade.

Income portfolio performance in 2024

It turned out to be a great year for investors in this diversified basket of dividend-paying shares. Crucially, we achieved the primary objective of generating at least £10,000 of income, but a stunning performance from two companies also guaranteed a modest capital gain for the portfolio.

Anticipating a yield of 6.4% when the portfolio was constructed, it was pleasing to achieve 6.2%, which netted £10,084 of income. The £163,000 it cost to put the portfolio together had increased to almost £167,000 by the end of the year, a return of 2.4%.

The biggest contributor was Lloyds Banking Group (LSE:LLOY), which chipped in nearly £1,400, a little more than I’d expected. A 45% surge in share price gave us a £9,000 profit and made it the star performer for me in 2024. Imperial Brands (LSE:IMB) was also responsible for over £1,000 of income plus a 43% share price rally equivalent to a £5,600 capital gain.

It’s at this point that I issue a reminder that investors don’t typically revamp an entire portfolio at the beginning of a calendar year. The reason I make changes to this income portfolio is to ensure the exercise remains relevant whether you’re an existing investor or coming to the portfolio for the first time. But this year there are only three changes, and none are particularly radical.  

The shares that stay in 2025

Seven companies from the 2024 portfolio keep their place. It’s cost £152,000 to put this basket of 10 shares together and, if everything goes to plan, it will generate a dividend yield of 6.8% to give over £10,000 of income. I’ve built in some contingency to cover risk this year, given some high yielders have lowered the cost of the portfolio.

Pharma stocks had a difficult 2024. My income pick GSK (LSE:GSK) got off to a great start, rallying 25% in just over four months before ending the portfolio period down 12%. Still, the 3.9% dividend yield was slightly more than expected, and there is little alternative in the UK large-cap pharma space. AstraZeneca (LSE:AZN) has generated greater capital gains, but it is not an income play. It’s why GSK gets my vote again in 2025. A forecast yield of 4.7% plus a stock trading at the bottom of its long-term range of roughly between 1,300p and 1,800p, make it one to own in this portfolio.

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When I picked National Grid (LSE:NG.) for the portfolio last year, I didn’t know that within a few months it would announce the UK’s biggest rights issue since 2009. Still, the share price bounced back and generated a modest gain for the year. It gave us a dividend yield of 5.8%, but the payout has been rebased, so future divis will be smaller. However, the company has promised to grow the payout in line with annual CPI inflation plus housing costs (CPIH), so the forecast yield is still about 4.7%, which is competitive in the sector. The £6.8 billion fundraise has also provided National Grid with resources to help fund a higher-growth investment phase which runs to 2029. On this basis, and because the alternatives are no more attractive, I’m sticking with National Grid in 2025.

I want to maintain exposure to UK insurers as I have done since the first £10,000 portfolio in 2015. And I’m going to stick with Legal & General Group (LSE:LGEN) this year, as I have done every year since 2021. It’s been a steady contributor to the portfolio and is tipped to yield 9.3% in the year ahead versus Aviva (LSE:AV.)’s 7%. Yes, Aviva is grabbing all the headlines now, but the acquisition of Direct Line Insurance Group (LSE:DLG) carries execution risk and good news is already baked into the share price.

M&G Ordinary Shares (LSE:MNG) shares have traded not far either side of 200p for the past four years. That level of consistency and a commitment to the dividend, which many doubted could be sustained, has made the asset manager a fixture in this portfolio since 2021. Because it delivers, it’s impossible not to keep M&G and its prospective dividend yield of 10.2% in the portfolio for a fifth year.

Despite its struggles, I would still like exposure to the mining sector, and last year’s pick still looks like the one to own. Rio Tinto Registered Shares (LSE:RIO) is backed to deliver a sector-leading 7.1% dividend yield, and there’s the possibility of capital upside if there’s any boost to the Chinese economy. Of course, uncertainty around tariffs and their impact is an overhang, but Rio is the income play when it comes to large-cap miners.

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Sainsbury (J) (LSE:SBRY)’s did a job for me last year, generating annual income of £924, although the share price fell 10%. Picking Tesco (LSE:TSCO) would have made more money for the portfolio given the shares added 29% in the past 12 months, but this is an income portfolio, and the country’s largest grocer yields much less than its nearest rival’s prospective 5.5%.

Taylor Wimpey (LSE:TW.) is the highest-yielding housebuilder and still has plenty of recovery potential. True, the housebuilding sector could do with a better economic outlook and lower interest rates, but the share price already factors in a lot of bad news. Labour has also developed a plan to boost the number of homes built each year to 300,000 over the life of this government. Yes, it’s a long shot, and that target looks hugely ambitious, but the sentiment is there and can only be a positive. A yield of 8.3% and recovery potential make the stock one for the portfolio this year.

Heading for the exit

It was the right decision to swap out British American Tobacco (LSE:BATS) for Imperial Brands in 2024. Both tobacco stocks generated substantial capital returns, but Imperial did better by about 10 percentage points and yielded about the same. While Imperial has been a star performer for this portfolio, the share price surge means the prospective dividend yield has shrunk to a comparatively modest 6%. I can do better elsewhere.

Morgan Advanced Materials (LSE:MGAM) had a pretty good debut in the income portfolio. It generated exactly the yield I hoped it would and ended the year with only a modest capital loss. However, the 4.4% income on offer is not attractive enough to book a place in a competitive portfolio in 2025.

The hardest decision this year is which bank stock to include. Lloyds Bank repaid the faith of loyal shareholders, adding 45% during the period of this portfolio and yielded almost 7%. Assigning 12% of the portfolio to the bank’s shares was a good move. There aren’t many in the UK bank sector that can compete with Lloyds’ yield, and it would have been easy to keep it in. But there is one stock which piqued my interest, and it’s the reason Lloyds loses out this time.  

Three more for 2025

BAT yields 7.4% and trades on a similarly modest valuation to sector rival Imperial Brands. The extra income is valuable, so BAT gets the nod over Imperial this time.

To replace Morgan Advanced Materials, I’ve gone back to a sector and a stock I’ve not included here since 2022 – BP (LSE:BP.). Valued on a par with its blue-chip rival Shell (LSE:SHEL), BP is expected to generate a yield of 5.9% in 2025 versus a modest 4.4% at Shell. Yes, it has a highly geared balance sheet and risk of earnings disappointment, so this is perhaps the riskiest of this year’s 10 stocks, but management is expected to address these concerns and deliver the expected dividend.

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Deciding the right exposure to the banking sector has been difficult this year. From an income perspective there are only two options – Lloyds or HSBC Holdings (LSE:HSBA). The former has been in this portfolio two years in a row, with one bad year and one good year. The predicted yield for 2025 is about 5.5%. HSBC appeared in four of the first five years of this portfolio and currently offers a forecast dividend yield of 6.1%.

HSBC shares have done well in recent months, which has diluted the yield slightly, while Lloyds suffered a big setback with the motor finance litigation issue in October. Despite a recovery, the situation is an overhang I can avoid by choosing HSBC’s superior yield.

Source: ShareScope, analyst estimates. All figures as at 4 February 2025.