With the Bank of England cutting interest rates down to just 0.1% earlier this year, cash simply isn’t making you money. When you add in the current rate of inflation, cash sitting in your current account is actually losing you money. The value of it is being eroded by inflation over time. For investors, we don’t just want to make enough interest to cover the impact of inflation. We actually want to use the funds to generate a positive cash flow, via passive income. Earning 4%-7% a year in passive income from our cash funds is possible, by investing in FTSE 100 stocks that pay out dividends.
United Utilities Group (LSE: UU) provides water services to the North West of England. Headquartered in Warrington, the firm has a solid track record as a publicly listed firm for several decades. As utilities are not classified as a growth sector, UU uses a dividend as a tool to keep investors happy. At present, the dividend yield sits at 4.76%.
This appears to be a sustainable dividend, for investors to pick up passive income for the future. In the latest trading update last month, the business said second-half revenues are likely to be down around 5% from the first half of the year. An increase in household consumption is slightly outweighed by reduced business consumption. This is logical, but it’s evident that the business is not anticipating a large fall in revenue or profit as a result of Covid-19.
As a result, I’d feel comfortable buying the stock for passive income into next year and beyond. With a yield of almost 5%, it’s high enough to give good returns, but not unsustainably high. Some stocks with a dividend yield above 10% could be under pressure of a dividend cut. For UU, around 5% is not a cause of concern for shareholders, I feel.
Schroders (LSE: SDRC) is a large asset management company. It has an extended presence around the globe, with reported assets under management in 2019 of over £500bn. The share price was down as much as 36% earlier this year. It has rallied somewhat, but is still down on the year. This is one large factor that has bumped the dividend yield up to 6.2%.
The dividend yield is nowhere near as high as similar firms in the industry such as M&G or Standard Life Aberdeen. When such yields start to creep to 10% or higher it usually starts sounding warning bells in my mind. So I’d be happy in picking up passive income via the Schroders dividend as a safer play.
Half-year profits did dip by 10% as investors rushed out of funds, but the AUM figure has been recovering in recent months. Given that Schroders services various different segments from retail to institutional clients, the risk is well spread. Again, I feel that the dividend should be supported into 2021 and beyond unless we see another market crash similar to March.
Passive income via an ISA
The two above stocks are good examples of how sustainable passive income can be found right now in the FTSE 100. I’d also make sure that I buy the stocks within an ISA to enable me to benefit from receiving the dividends gross of tax. That way, not only are we beating inflation, but also generating a positive cash flow!
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.