Investing in FTSE 100 shares is a great way to build passive income for retirement. Many stocks listed on the index pay incredibly generous dividends, and aim to increase them every year. That won’t just give me a passive income that I don’t have to lift a finger to receive, but one that rises over time, with luck.
Many companies offer share buybacks on top, which is another way of returning cash to investors. In fact, AJ Bell reckons that when you combine both, the FTSE 100 is on course to offer a combined total cash return of 6.6% this year. If I buy shares today, I can lock into this and hopefully watch it rise over time.
This is how I’d build passive income
As well as dividends, there is the opportunity for share price growth as well. If the FTSE 100 climbs, this will protect the value of my portfolio, so I will not deplete it too much by making income withdrawals in retirement.
So it’s FTSE 100 shares for me, all the way. Yet I am also aware of the risks. Dividends can be cut at any time, as we saw both during the financial crisis and early stages of the Covid pandemic. That is not the only danger. Even FTSE 100 stocks can fall out of favour or even go bust.
This is why my portfolio of FTSE 100 shares will always contain a minimum of 12 to 15 companies. This will spread risk so that one or two failures will not do irreparable damage to the overall value of my portfolio.
Investing £1,000 a month is quite a tall order, especially as the cost-of-living crisis rages. It adds up to £12,000 a year. Most of us cannot afford to put away quite that much, but investing something is always better than doing nothing.
Reinvested dividends roll up
It’s a handy figure to use as a benchmark, to see how my portfolio’s value would roll up over time. The long-term total return on the FTSE 100 is about 7% a year, with dividends reinvested. Someone who started investing £1,000 a month at age 45 would have £576,069 by age 66, before charges.
This is a tidy sum, although inflation means the money will not buy as much as it does today.
Ideally, most people will start saving before long before they turn 40. Somebody who invested £1,000 a month at 35 would have more than £1.3m in their portfolio by 66. Now that is starting to look like serious money, and would certainly be enough to generate a generous passive income.
I would look to build a balanced spread of dividend-paying companies, which might include top financial stocks such as Aviva, Barclays, and Lloyds Banking Group, miners such as Anglo American and Rio Tinto, and possibly an energy giant like BP or Shell.
Housebuilders such as Barratt Developments, Persimmon, and Taylor Wimpey would also be on my target list. As would dividend heroes British American Tobacco, Diageo, Tesco, and Unilever.
There are more top dividends stocks like these on the FTSE 100, and I would add them over time. When I reached retirement, I’d sit back and start taking those dividends as income.
