How I’d invest in FTSE 100 shares to target £5,000 in passive income

To generate long-term passive income, I can’t think of anything better than buying shares in the UK’s best dividend-paying companies.

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Investing money to boost our passive income in retirement is becoming more and more important. And the sooner we start, the more years we’ll have to benefit from compounding returns.

My money goes in FTSE 100 shares. And I buy them in a Stocks and Shares ISA, to make my retirement income more tax-efficient.

Speaking of ISAs, investors might be tempted by a Cash ISA right now. With interest rates higher, some are even offering one-year fixed rates of 4%. That beats the 3.8% overall dividend from the FTSE 100.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Cash ISA?

So is a Cash ISA a no-brainer decision this year? I don’t think so, for three main reasons. One is that returns will have to fall when Bank of England interest rates start to decline again.

It might still make sense to bag the 4% from a Cash ISA this year, then move the money to a Stocks and Shares ISA later. But I reckon it’s definitely feasible to get more than 3.8% by buying individual FTSE 100 shares.

I also think shares are undervalued. So waiting a year could mean we miss some nice buys today. It’s surely better to get in and buy now while investors are wary, than wait until confidence has improved and shares are more expensive.

Beating the FTSE

How would I aim to beat the FTSE 100’s overall 3.8% dividend yield? Well, that’s the average of the whole index, and it covers quite a few that pay out little or nothing.

At the other end, we see investment manager M&G on a forecast dividend yield of a whopping 9%. Financial stocks are out of fashion right now. But they have a good long-term record of generating passive income.

Housebuilder Barratt Developments is on a forecast 7.8% yield. Sure, the property business is under pressure at the moment. But I rate the sector as another long-term cash cow.

Big dividends

British American Tobacco‘s yield stands at 7.3%, and mining giant Glencore looks set to pay 7%. Even Sainsbury offers a predicted 5.2% yield.

See what those five stocks provide, in addition to high dividends? That’s right, diversification. These are five companies, in five different sectors.

Each carries its own risks, and individual investors should be sure they’re happy with them before buying. But diversification can lower the overall risk.

Target 6%

I reckon a target of 6% per year in dividends is feasible, perhaps even conservative. To generate £5,000 per year in passive income at that rate, we’d need to build a pot of around £83,000.

That might seem daunting. But one way to look at it is to think that for every £16,700 we can accumulate, we could boost our annual passive income by £1,000 per year.

So that’s my long-term passive income strategy. Each year, I put what I can into my Stocks and Shares ISA. And I buy some of the FTSE 100’s stocks paying the best dividends. Oh, and I reinvest all my dividend cash.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and J Sainsbury Plc. 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.

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