As an older investor (I’m nearly 54), I’m always seeking extra passive income. This unearned income is money I make without effort, even while sleeping. Indeed, as billionaire investment guru Warren Buffett wisely remarked: “If you don’t find a way to make money while you sleep, you will work until you die.”
But in today’s world of near-zero interest rates, it’s way harder to earn passive income than, say, 15 years ago. Thus, to boost my income, I don’t invest in low-yielding bonds or keep too much cash on deposit. Instead, I invest in UK shares that pay high dividends. Dividends are cash distributions paid by companies to shareholders, usually half-yearly or quarterly. However, share dividends are not guaranteed. They can be cut or cancelled during stressful times, as happened widely in 2020. When we eventually retire, my wife and I will use our share dividends to top up our monthly pensions.
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Passive income from high-yielding shares
Currently, the UK’s FTSE 100 index offers a dividend yield of 4% a year. But some shares within the index produce much higher passive income. Yet the higher the dividend yield, the riskier it may be (all else being equal). In my experience, dividend yields above 10% a year usually don’t last. Either share prices rise or payouts get cut until dividend yields come down.
Earlier today, I found these 10 FTSE 100 stocks offering a current dividend yield above 6% a year.
|British American Tobacco||Tobacco||7.9%|
|Legal & General||Financial||6.0%|
So should I buy them? First, I’d never construct a portfolio consisting solely of these 10 high-dividend stocks. To avoid concentration risk, I’d spread my money across at least 25 different stocks. Otherwise, one bad result might batter my portfolio’s overall value. Second, this mini-portfolio of 10 stocks is heavily skewed towards just three sectors. Four constituents are mining companies and two are tobacco stocks, while another two are financial firms. Thus, there jst isn’t enough variety among these 10 shares to build a solid, reliable stream of passive income from dividends.
That said, I wouldn’t worry too much if I put say, 1% or 2% of my portfolio’s value into each of these 10 stocks (10% to 20% in total). After all, the average dividend yield across all 10 is almost 8.8% a year, which certainly appeals to me. Indeed, £1,000 invested in each stock (£10,000 in total) would produce a passive income of around £876 a year. Nice.
Which of these 10 dividend stocks would I buy?
When I worry about the next stock-market crash, I get more attracted to what I call ‘BBC shares’. These are stocks in Big, Beautiful and Cautious companies, usually members of the FTSE 100. In previous stock-market crashes, I found that my large-cap value stocks paying generous dividends fared much better than the wider market. And even when share prices went down, my dividends mostly kept rolling in during market meltdowns.
First, for mega-cap dividends plus exposure to a global recovery in 2022-23, I’d buy Rio Tinto stock at the current 4,883.89p. But I’d expect mining shares to be volatile in 2022-23, as they were in 2021. Second, for extra passive income, I’d also buy British American Tobacco at 2,726p. Cigarette manufacturers have been dividend dynamos for decades — although BAT carries £40.5bn of net debt on its balance sheet!