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

British workers will receive above-inflation pay rises this year, for the first time since 2008. At least that's what the majority of the country's finance directors believe, according to the latest survey from accountancy firm Deloitte.

That's welcome news - but, chosen sensibly, income growth from equity investments should easily outstrip any increase in either real earnings or the cost of living, by a substantial margin.

With the rules on ISAs significantly relaxed last summer, investors can currently save £15,000 each year in a tax-free wrapper.

Balanced portfolio

And the entire amount can now be invested just in stocks and shares. That allows investors, especially those with an existing portfolio of ISA investments, to build a large pot much more quickly.

But how much would an investor need to generate an annual income of £10,000, and which stocks should they invest in to ensure that dividend payments are both regular and sustainable?

We've put together a portfolio of 10 companies, mixing old reliables with a couple of speculative high-yielders. Between them they can produce the required income, for an initial investment of just over £182,000. Here we explain the thinking behind the decisions.

Any income portfolio should seek to maximise certainty and limit risk, which is why we've picked a balanced portfolio of equities. There is a handful of reliable dividend payers that deserve to be at the core of any serious ISA equity income portfolio.

For more stock ideas for your portfolio, read: Six higher-risk UK equity tipsand Six value-based UK equity tips.

Predictably, this includes companies from historically high income-generating sectors - typically low-growth industries such as utilities, tobacco and banks. We've invested £21,532 in each of the eight companies in this group.

However, with Alternative Investment Market (AIM) companies eligible for inclusion in Isas from August last year, investors now have more than a thousand extra shares to choose from when building an income portfolio.

Of course, the junior exchange is by its very nature higher risk than the main market, and its reputation is as a home for high-growth stocks rather than income plays. But spicing up the hunt for yield in exchange for a little extra risk can have a significant impact on the outcome for this portfolio.

AIM-listed companies

And there are many superb companies listed on AIM with an established track record of generous dividend payments. They are generating lots of cash and returning a sizeable chunk of it back to shareholders.

In fact, a number of them pay some of the best dividends around, and shareholders have been amply rewarded. However, for the purposes of this portfolio, we have invested just £5,000 in each of our two more speculative high-yield stocks in order to reduce risk.

It is, of course, the reliability of dividend payments that is important here, which is why even long-term investors must regularly check their portfolios and keep an eye on any potential problem stocks.

Checking the financial health of your investments should be a regular job. The share price will usually tell you if a company is having problems, which could spell trouble for the dividend.

Warning signs tend to start flashing when dividend cover - the factor by which a company's annual earnings exceeds dividend payments - drops much below two times.

It could fall further without endangering the payout (strong cash flow can help cover a lean year), but further investigation is certainly sensible.

It's also worth remembering that if a dividend yield looks too good to be true, it probably is. Over 6% is high but may well be sustainable, but hit double figures and there had better be a good explanation.

Often, it can mean that the market just does not believe the payout will last. If it did, investors would dive in, pushing the share price up and the yield down.

But if the worst does happen, it is hardly the end of the world. Switching your cash from one bad apple into a more reliable dividend payer is easily done, and will limit the damage to your equity income portfolio.

Which stocks did we pick?

Shell is one of the oil industry's most reliable dividend payers. It hasn't cut the payout since World War II and total dividends have shown compound growth of 5% since 1989. A plunge in oil prices has clipped 17% off the share price since September, and shares now trade at a discount to domestic peers BP and BG Group.

Shell has a strong balance sheet, too, which underpins the payout even during lean times. And it is this reliability of income and growth that gives Shell the nod over BP, whose decision to raise the third-quarter payout by 5.3% has been called an "unnecessarily brave move".

Shares in BAE Systems continue to trade at a large discount to European defence peers, most likely due to weak cash conversion in recent years and an expectation that customer advances will reduce in the years ahead.

But profits are forecast to grow by mid-single digits in the coming years, which will easily cover payouts to shareholders and should underpin BAE's progressive dividend policy. A resumption of revenue growth, predicted for 2015, could even spark a re-rating.

Not surprisingly, HSBC has passed both European and UK bank stress tests. True, it has not been immune from the post-financial crisis fallout and the odd scandal, but it remains one of the world's largest and most reliable banks.

With a strong balance sheet, it has kept growing the dividend since the credit crunch and, despite rising operating costs, exposure to higher growth economies in the Far East make it one for income-seekers to own.

The slump in global commodity prices since the summer has hurt BHP Billiton. Iron ore and petroleum, its two main money-spinners, have been particularly hard-hit and the company has lost about a fifth of its value.

But BHP has made a commitment to maintain a strong balance sheet and a progressive dividend, which is widely regarded as untouchable by both management and the City. In fact, the payout is tipped to grow by 5% for at least the next few years. The company can pay special dividends, too, but is being prudent in this regard for now.

A profits warning and bribery scandal in China marked low points for GlaxoSmithKline in 2014. Thankfully, third-quarter results beat expectations and a $492 million (£326 million) fine made the China problem go away. Glaxo has cut costs, too, and a partial initial public offering of Viiv Healthcare is on the cards.

A tie-up with Novartis should also complete during the first half of 2015, and Glaxo's promise to keep this year's dividend at 2014 levels (80p), despite a slump in the share price, has been welcomed in the City.

Regular dividends

Imperial Tobacco Group is one of the smaller tobacco companies, but was among the best performers in 2014. Imperial, best known for Gitanes cigarettes, Golden Virginia tobacco and Montecristo cigars, has agreed to pay Reynolds American over £4 billion for a portfolio of US cigarette brands and e-cigarette business blu.

Expect approval this spring. And after more than a decade of uninterrupted dividend growth, Imperial has promised to pay regular quarterly dividends and increase the payout by at least 10% a year.

Water company and former bid target Severn Trent pays the fattest dividend of the three listed UK water companies - currently retail prices index (RPI) inflation plus 3%.

A new deal on prices is about to be agreed with industry regulator Ofwat, and there is a small risk that this may result in a decrease in the payout. However, a mooted 4% for the year to March 2016, then RPI plus 2% through to 2020, is generous and reliable too. That will be clarified soon.

National Grid owns the UK's high-voltage electric power transmission network and four of the eight regional gas distribution networks.

True, it's been a popular stock for the past four years and the share price has risen sharply, but shares still yield well over 4% and management promises sustainable dividend growth, at least in line with RPI inflation, for the foreseeable future.

entu (UK), the Manchester-based supplier of windows, doors, solar panels and energy efficiency products, only began trading on AIM in October.

It hasn't paid a dividend yet, but if business goes as well as expected, the owner of regional brands including Zenith, Weatherseal and Staybrite will pay a dividend of 8p a share in 2015. A payout at that level would be covered 1.6 times by forecast earnings.

Internet sports betting firm GVC ended 2014 with a bang, and 2015 has started in much the same vein, which spells good news for the dividend.

There is currency risk as dividends are paid in euros, but a third interim payout of 12.5 euro cents is up 9% on last year, and the company has paid special dividends in the past when things have gone well. Trading mostly outside the UK, the new HMRC tax regime on online gambling will not hit it as hard as rivals either.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.