How can I build an income portfolio with £10k

Building a passive income stream is a financial goal that many Britons currently share. It's not hard to see why – with more consistent cash flow, investors have more financial freedom and flexibility.

The good news is that you don't need a lot of money to start working towards this goal. With that in mind, here's how I can build an income portfolio for £10k today.

The right investment vehicle

If I had £10k in cash and was looking to create a long-term income stream, the first thing I would do is open a Stocks and Shares ISA. This will be the investment vehicle for my income portfolio.

Why would I use this type of account? Three reasons. First, all of my income will be completely tax free (a huge benefit). Second, I could buy high-yielding investments like dividend stocks. Third, I could access my money at any time.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Many ways

Next, I'll look at building a high-yield investment portfolio. And there are several approaches I can take here.

I can invest in a fund that aims to generate income. Here is an example Vanguard FTSE UK Equity Income Index. It offers a yield of around 5% currently. In other words, if I invested my £10k in this product, I would pick up around £500 in income per year.

Alternatively, I would invest in investment trusts that focus on cash. These are similar to funds but traded on the stock market. One example here is Merchants Trust. It also offers a yield of about 5% today.

But what I think I'm going to do is pick a bunch of high-yielding stocks (these stocks pay cash to shareholders every time the company profits). This may give me a higher yield.

I might walk away with eight different stocks (£1,250 each, ignoring trading commission). This would help diversify my portfolio and reduce my risk levels.

Good income stock

Now, I wouldn't really go for the top manufacturers on the market. Sometimes, high-yield companies have significant problems. And these problems can lead to a weak share price. This can reduce any benefits from income.

What I can do is look for companies that produce healthy products with attractive long-term prospects. I would also look for companies with decent dividend coverage ratios (this is the ratio of earnings to dividends and gives an indication of how sustainable a company's dividend is).

One company fits the bill here HSBC (LSE: HSBA). Its yield is definitely attractive. Last year, the bank paid 61 cents per share to investors. That means a yield of about 7% today.

Meanwhile, the dividend coverage ratio is strong. Last year, it was around 1.9, indicating that earnings comfortably covered the dividend payout.

Additionally, the company has good long-term prospects. In the coming years, HSBC plans to focus on high-growth banking areas such as Asia and wealth management.

Of course, the banking industry can be volatile at times. So there is a chance that returns from this particular stock may be disappointing in the short term (profits are not guaranteed).

However, if I were to pick eight stocks from different areas of the market, including a few defensive plays, I think my income portfolio would bring me a decent return over time.