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One of the most important aspects of investing for passive income is maintaining a diversified portfolio. The goal is to reduce risk by spreading your investments across different types of shares — such as income, growth, and defensive stocks.
By doing so, an investor avoids losses if one segment performs poorly, as others can help balance the overall returns.
By including various types of shares from different sectors, you also get exposure to the best of both worlds. Dividend stocks provide slow but steady income regardless of short-term market swings. Growth stocks focus on capital appreciation, offering the potential for better returns but with increased volatility.
And finally, the defensive nature of stable sectors like utilities or healthcare smooth out volatility in rough times.
Let’s take a look at two examples for beginners to consider when building their first portfolio.
M&G
With one of the highest yields on the FTSE 100, M&G (LSE: MNG) offers a very appealing investment case for income. At around 9.2%, its yield would usually be considered too high to be sustainable. But the wealth management firm might be one rare example of a company that can cover it.
It currently maintains earnings coverage of 1.4 times — sufficient so long as profits remain consistent. With a diversified business that benefits from a broad client base and recurring revenue streams, it enjoys resilient cash flow in various market conditions.
There is the risk of regulatory changes, competition from other asset managers, and potential shifts in investor preferences away from its products. But for investors prioritising regular income with moderate risk exposure, M&G may be worth considering when building a diversified income portfolio with income in mind.
Games Workshop
Games Workshop (LSE: GAW) is a FTSE 100 growth stock with a unique model built around the intellectual property of the Warhammer series. The hugely popular fantasy game business comprises miniature sales, global retail stores and lucrative licensing deals.
Recent trading updates show core revenue rising around 15% year on year and earnings up 30%, highlighting strong demand despite a tough consumer backdrop.
But like many growth stocks, its valuation is now sky-high, leaving it little room for growth. If an economic shock like fresh tariffs or rising rates hurt sales, it could suffer a sharp correction.
But the company is still pushing ahead with growth plans, ramping up manufacturing capacity and reaping the benefits of brand extensions, video games and and media partnerships. All this helps bolster its long-term earnings visibility, adding to its passive income credentials.
Final thoughts
Building a passive income stream is best viewed as a journey rather than a set-and-forget strategy. It requires patience, regular contributions and a disciplined mindset. Some investors opt for the ease of a managed index fund, but by picking individual stocks, investors can aim for greater returns.
The trick is careful diversification and regular rebalancing. M&G and Games Workshop are just two examples of stocks to think about for a beginner’s portfolio. For the best results, smart investors constantly monitor the ever-changing roster of stocks on the UK market.
