Building a dividend stock portfolio capable of generating a ton of passive income is very simple right now. Today, many UK stocks are boasting exorbitant returns.

Here I’ll construct a hypothetical income portfolio of four stocks with a yield of 7.8%. With a total investment of £10,000, this portfolio could potentially generate income of almost £800 per year (excluding taxes if the shares were held in a Stocks and Shares ISA).

Please note that tax treatment depends on each customer’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. This is not tax advice nor does it constitute any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.

Stock income

In the table below I have listed four FTSE100 stocks from different sectors and their prospective dividend yields. I’ve also shown the amount of dividends each share could potentially generate per year from an investment of £2,500.

Among the four companies, the savings and investment giant M&G (LSE: MNG) has the highest yield at 10.5%. The average, however, is around 7.8%, meaning that £10,000 invested in the four stocks would generate an annual income of around £780.

It’s not guaranteed, but I’m sure readers will agree that this is an impressive return. It’s almost twice the rate available today on a UK savings account.

The risks of dividend stocks

Of course, stocks and savings accounts are very different. With a savings account, the capital is safe. And the interest rate offered is guaranteed.

With stocks, capital is at risk because a company’s stock price can fall. And dividends are never guaranteed. Sometimes, if a company experiences a decline in profits, it will reduce or cancel its dividend payout to conserve cash.

Coming back to the four companies in the table, three of them (Aviva, P.A.And Sainsbury’s) have at times cut their dividend payments over the past decade as they faced difficulties.

So we need to do a little research before buying dividend stocks to generate income. It is not wise to get into a stock just because it offers a high return.

My choice

Of these four, I like M&G the most, although I don’t buy because I already own it. Prudential.

As a savings and investment company, I think it has a relatively bright future, given that people around the world (it operates in over 25 countries) need to save and invest more for their retirement.

And stocks look pretty cheap today. Currently, M&G has a forward-looking vision price/earnings ratio (P/E) of eight, which is well below the market average.

Of course, the risks I mentioned apply here. Although the company has not reduced its dividend payout since entering the market in 2019 (when it spun off from Prudential), there is no guarantee that it won’t do so in the future.

And there is a possibility of stock price weakness. This type of company can see its share price suffer in the event of volatility in the financial markets and a decline in the value of assets under management.

Building a Good Dividend Stock Portfolio

Since every company faces unique risks, it makes sense to hold at least 15 different stocks in a dividend income portfolio. This can significantly reduce stock-specific risk.

The good news is that there are plenty of high yielding stocks on the UK stock market today. If you are looking for investment ideas, you can find many here on The motley fool.