With UK income bonds collapsing in September, FTSE 100 shares look even more enticing today. Obviously, the stock market has been no stranger to volatility in 2022. Yet plenty of excellent businesses within the flagship UK index have seen their share prices tumble, despite showing resilience to the troubling macroeconomic factors.
That’s why, personally, I can’t help but think there are buying opportunities for my portfolio. Even more so when looking at the dividend prospects for the FTSE 100. Following its 8% decline over the last 12 months, the index is expected to offer an enticing 4.1% yield by the end of the year.
That’s the highest it’s been since the pandemic started. So how can I capitalise on this passive income opportunity for my portfolio?
Unlocking passive income with FTSE 100 shares
As mentioned, FTSE 100 shares are expected to offer an average yield of 4.1% this year. Obviously, with economic uncertainty plaguing the markets, there is no guarantee that this level will be hit. And depending on the severity of inflationary pressures, the yield may fall as companies cut shareholder payouts.
Having said that, should the macroeconomic environment improve, the opposite is also true. The steady recovery of consumer spending could propel businesses back into growth mode, unlocking an even higher yield.
Even with this uncertainty looming over the markets, FTSE 100 shares appear to be a more attractive passive income opportunity than bonds. The sudden spike in interest rates may make the latter seem more lucrative. But with so many companies still reeling from the effects of the pandemic, there are growing fears that default rates could soon be on the rise.
Investing in a careful selection of income bonds would likely mitigate this risk. Yet I’m sceptical that these higher-quality debt instruments can offer the same yield as the FTSE 100 this year.
Risk versus reward
While top-tier income bonds might not be as lucrative as stocks, they remain far less risky. Don’t forget repayment of debt obligations has a far higher priority for businesses than shareholder dividends. And if the current inflationary environment worsens, the pool of excess earnings used for shareholder payouts may begin to dry up.
In other words, volatility in the stock market might be here to stay for a while. That obviously introduces additional risk to the investor’s portfolio.
Fortunately, a lot of this risk can be mitigated through diversification. What’s more, as bleak as the situation seems, it’s worth remembering that the stock market has a perfect track record of recovering from the worst economic catastrophes. And I’m pretty confident that’s not about to change.
That’s why I believe some of the best FTSE 100 shares today could end up being highly lucrative investments in the long term, both in terms of dividends and share price appreciation.
