The idea of receiving a regular stream of passive income probably appeals to everyone. However, to generate meaningful income you need to maintain a sizeable portfolio. 

For example, let’s say someone had £10k. They could spend this today (immediate gratification) or invest it in the hope of gaining more in the future (delayed gratification). Here’s why the second choice is clearly the better one when it comes to passive income.

Stage 1

When I say investing, I’m thinking about UK companies that pay dividends. Note how I used the plural — companies. It’s crucial not to put all your eggs in one basket, as businesses can run into trouble and individual dividends are never guranteed.

The good news is that 10 grand’s easily enough to create a diversified portfolio. You could buy, say, eight shares to offset the risk that one turns into a major disappointment.

The FTSE 100 is packed with high-quality dividend stocks, including Aviva (LSE:AV.), with a forecast 6.4% yield, and Barclays, on 3.9%.

An average yield of 5% is a realistic portfolio target, in my opinion. That would result in £500 in annual passive income from £10k.

Stage 2

Remember when I used the term ‘delayed gratification’ in relation to passive income? Well, there’s another level — dividend reinvestment. That’s automatically buying more shares with the dividends rather than spending the cash.

These additional dividends would ideally pay more dividends in future, and on and on… Investing this way, the value of the portfolio would have more than doubled, to £23,533, after 20 years.

However, this doesn’t factors in share price or dividend growth over this time. If we assume the portfolio grows at 8% a year then, the total value eventually reaches £46,610 after two decades. 

Stage 3

Finally, if someone were to invest £250 every month on top of their original £10k, that would change the picture entirely. By my calculations, the portfolio would grow to around £190,000 after 20 years. At this point, it would be generating between £12,000 and £13,000 a year in dividends.

So that’s roughly £1,050 a month on average, which could be taken as passive income.

A starter stock

Returning to insurance group Aviva, I think this has all the hallmarks of a great starter stock to consider.

First off, Aviva’s the UK’s largest insurer, with 21.8m customers and 25m globally. So it has a massive existing customer base, which it continues to benefit from (46% of new sales are to existing customers).

The company’s also leveraging AI to accelerate claims processing, including developing an end-to-end voice AI agent that can handle most basic telephone claims. This has the potential to cut costs and boost profitability.

As mentioned, the forecast dividend yield is 6.4%, one of the highest in the FTSE 100.

Finally, the stock has dipped 8.5% since mid-August. This may reflect inflationary challenges building in the UK economy, which adds risk. But it also leaves Aviva trading reasonably, at less than 12 times forward earnings.

Add in that high-yield dividend, and I think Aviva offers a lot of value. It could really boost an income-focused portfolio over the next few years, alongside other FTSE 100 stocks…

Should you invest £5,000 in Aviva Plc right now?

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Ben McPoland owns shares in Aviva.