I’d buy these 5 FTSE stocks for £100 in monthly passive income

Our writer explains how he’d use quality dividend shares to build a steady and reliable passive income stream and shares his top picks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young black woman in a wheelchair working online from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There are multiple ways to earn passive income but my favourite method is owning dividend shares.

Dividends are paid to shareholders in return for investment in a company. They’re effectively a share of the profits.

But with hundreds of FTSE stocks available to buy, how can I sift through and find the best options for an income top-up.

Crunching the numbers

First, I’d start with a target. Let’s say I want to earn £100 every month in passive income. That’s £1,200 a year. To achieve this goal, I need to calculate how much I’d need to invest.

The answer depends on the dividend yield of the shares that I buy. Right now, the average FTSE 100 yield is just over 4%. According to my calculations, that means I’d need to invest £30,000 to reach my goal.

But I reckon I could earn £100 in monthly dividends by investing just half of this sum. I’d aim to do this by finding shares that yield over 8%.

Looking the FTSE All-share index, I note that 41 shares offer dividend yields of 8% or more. But I’d want to narrow down my list to five top stocks.

My criteria

A company’s dividend yield isn’t the only factor to look at. A high yield is no use to me if it’s not sustainable, or reliable.

I want my dividends to be affordable for the company to continue paying out. That’s why I prefer dividend cover of greater than 1.2 times.

Dividend cover measures how much a dividend is covered by a firm’s current earnings. A figure of less than one indicates that it doesn’t earn enough to cover its anticipated payout.

Granted, it could still pay from its cash reserves, but I prefer companies that don’t need to dig into their savings.

For reliable passive income, I’d want to pick stocks that also have a consistent and long dividend history. And looking to the future, I’d want confidence that earnings will be sustainable.

Top passive income stocks

So which stocks meet my criteria? If I had some spare cash right now, I’d buy Rio Tinto, Taylor Wimpey, Phoenix Group, Legal & General, and Imperial Brands.

This group offers a 9% dividend yield. In addition, it has average dividend cover of 1.8, which implies that earnings comfortably exceed dividends.

Lastly, this selection has an average 18-year history of consistently paying out cash to shareholders.

Bear in mind that global miner Rio Tinto and UK housebuilder Taylor Wimpey are both cyclical businesses. Earnings could fall in a recession. That could result in a dividend cut, reducing my dividend income.

However, my selection diversifies by owning shares across several sectors. Instead of putting all my eggs in one basket, I’d be spreading my risk across each share equally.

Also, share prices can swing up and down. But as I’d own quality companies that I expect to thrive over many years, I can effectively ignore day-to-day share price volatility. Instead, I would hope to enjoy a steady stream of passive income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »