Sit back and collect regular cash from the FTSE 100 index with little or no effort.
I'm sure you, like me, are attracted to the concept of 'passive income' -- essentially receiving regular cash for little or no effort.
In my view, there's no better way of creating a respectable passive income than by investing in the stock market. Essentially, you buy some shares and sit back as you collect the dividends they pay... and hopefully watch your capital grow as well.
(That said, all stock-market investment comes with risk, and the price and income from any investment can fall as well as rise. If you can't risk your capital or income ever falling in value, shares are not for you!)
Here's how to put the theory into practice, with three easy ways to earn a passive income from the FTSE 100 (the benchmark index that represents the 100 largest companies trading on the London market).
1. Trackers and exchange-traded funds
Method 1 is to simply follow the FTSE 100 (UKX) via a cheap index tracker. No need to buy a basket of individual shares here -- you just buy a single fund where the underlying portfolio is invested in all the shares that are members of the FTSE 100 index.
One option is the iShares FTSE 100 (LSE: ISF), which is an exchange-traded fund (ETFs) that can be bought and sold just like an ordinary share and whose price tracks the FTSE 100 index up and down.
During the last 12 months, this iShares FTSE 100 fund has accumulated cash from major companies such as Royal Dutch Shell and GlaxoSmithKline, and in turn paid out dividends totalling 20.27p per share. You can buy the iShares FTSE 100 share today for about 609p, thereby giving you a potential passive income of 3.3% a year.
2. Employ an expert manager to create your passive income
Of course, you may wish to back an expert who could deliver a passive income that's greater than what you can enjoy from the wider FTSE 100.
One particular expert of note is Neil Woodford, who works for fund manager Invesco Perpetual and controls two of the country's largest dividend funds. If you ask me, Mr Woodford is best-choice investor around for ordinary people wishing to let somebody else do their income investing for them.
As this article shows, the dividend growth and capital performance from Mr Woodford's portfolios have trounced that of the FTSE 100 during the last 10 years or so. Mr Woodford invests mostly in FTSE 100 companies, and his current favourites include AstraZeneca and Imperial Tobacco.
One way of allowing Mr Woodford to create a passive income for you is through Edinburgh Investment Trust (LSE: EDIN). Similar to that iShares ETF, this investment trust can be bought and sold like an ordinary share, but here the fund's underlying portfolio contains the FTSE 100 shares picked by Mr Woodford himself.
Last year, Mr Woodford's Edinburgh trust paid dividends of 22p per share and the price today is 516p. So you could earn a 4.3% annual passive income from Mr Woodford, assuming the trust's payout is maintained.
3. Do it yourself and create your own passive income from shares
Finally, you can always create your own passive income by acquiring a good spread of hand-picked dividend shares yourself!
True, this may take more nerve and a bit more skill than buying a FTSE 100 ETF or selecting a talented fund manager to create your passive income for you.
But the DIY passive-income rewards could be greater than going down either the tracker or expert route. Indeed, here are five household-name members of the FTSE 100 that currently combine to deliver a potential 5.5% passive income a year:
| Share | Price | Annual dividend per share | Yield |
|---|
| Admiral | 1,197p | 81.6p | 6.8% |
| BAE Systems | 350p | 19.1p | 5.5% |
| BP | 461p | 20.9p | 4.5% |
| J Sainsbury | 327p | 16.4p | 5.0% |
| National Grid | 689p | 39.8p | 5.8% |
| | | | |
| Average | | | 5.5% |
Of course, owning five shares won't provide you with the same diversification as owning all 100 names within the FTSE 100 or the dozens contained in Mr Woodford's fund.
However, this free report from the Motley Fool does reveal several more FTSE 100 stocks that offer dividend yields in excess of the wider FTSE 100 average. Similar to those in the above list, these particular names are also prominent British businesses that have proved themselves to passive-income investors over many years.
You can download this special dividend report to help build your passive income portfolio by just clicking here (the report is free and comes with no further obligation).
Plus, if you are new to the stock market, the Motley Fool has also published a free report that provides a good introduction to shares in general. You can read that report immediately by clicking here (this report is free, too).
Little or no effort
As I wrote at the start, I'm attracted to the concept of 'passive income' -- essentially, receiving regular cash for little or no effort.
In my experience, backing some of Britain's greatest companies -- and collecting a slice of their profits every year through dividends -- is, I feel, one of the more achievable and reliable sources of passive incomes right now.
Let me finish by wishing you the best of luck if you are taking the plunge with shares and building your own a passive income!
> Maynard does not own any share mentioned in this article.
