The FTSE 100 index includes many dividend-paying shares. And I reckon dividend income is an excellent way to earn passive income for life.
When a listed company pays dividends, it distributes a share of its profits to shareholders like myself. So I’d want to pick companies that have good prospects for future earnings.
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So how do I go about doing so? First, I’d need to decide how much I want to invest and for how long. As a long-term investor, my timeframe is over five years. In the near term, share prices can rise and fall due to market sentiment. But several years should allow a good company to demonstrate its value.
Buying the FTSE 100
If I was investing £5,000 today, I could buy a FTSE 100 index fund. On average, the UK’s leading shares pay a dividend yield of around 4%. Normally, that wouldn’t sound too bad.
But right now, UK inflation is at the highest level since 1982. Prices are rising rapidly as I can frustratingly see at the fuel pump, supermarket and on my energy bills.
A 4% dividend yield won’t keep up with rising prices, so I’d prefer to aim higher. I’ve found several FTSE 100 shares I’d buy that yield over 8%.
8%+ dividend yield
For instance, I’m drawn to mining giant Rio Tinto. Currently, it offers a whopping 13% dividend yield.
A word of warning, however. This sounds particularly high to me, and there is a risk that lower future earnings could result in its dividend being cut. Even so, Rio has a rich history of reliably distributing dividends.
As the second-largest metals and mining operation in the world, its earnings prospects are sound and I reckon it’s likely to continue thriving for many decades.
Next, I want to pull the trigger on Phoenix Group Holdings. It may not be a household name, but it’s a FTSE 100 business worth over £6bn. It focuses on long-term savings and retirement businesses.
Phoenix is also a reliable dividend payer that currently offers an appealing 8% yield. I also like that it has regularly paid dividends for 13 years and has a track record for growing its dividend consistently.
Bear in mind that falling share prices in general is a risk to earnings but, with 240 years of experience, I’m confident that it is resilient enough to manage.
Chunky passive income
If I invest in these two individual shares, on an initial investment of £5,000 then I would expect to receive a passive income of £525 every year. That sounds great to me.
But over time, I would try to add funds to my pot to eventually reach £100,000. That should be enough to pay an annual passive income of £10,500. It’s not quite enough to retire, but adding it to other pensions should allow for a more comfortable retirement.