FTSE 100 stocks are right at the top of my list when it comes to dividend investment opportunities. Currently, the average Footsie yield is 3.7%, but many companies in the lead index provide even greater passive income streams.
Enjoying a blissful retirement living solely from dividend income might seem like a distant pipedream. Achieving this goal would certainly require financial discipline and a long investment horizon. Nonetheless, it’s a worthy aim — and one I’m actively pursuing.
Here’s how I’d target a purely dividend-funded lifestyle.
Investing in blue-chip shares
One attractive aspect of FTSE 100 shares is the high number of Dividend Aristocrats among their ranks. These are companies that have long track records of increasing shareholder pay-outs on a consistent basis.
Although no dividends are guaranteed, investing in stocks with solid dividend growth streaks is about as safe as it gets.
That said, even former passive income champions like GSK can fall short of expectations. Showcasing the risks of dividend investing, the pharma giant recently cut its distributions to prioritise investment in R&D.
A good way to minimise the risks involved is portfolio diversification. By spreading my stock market holdings across a range of industries, I’d reduce my exposure to sector- or company-specific shocks.
Some examples of Footsie shares with reliable dividend histories I’d consider investing in include:
- British American Tobacco — 8.47% yield
- Diageo — 2.19% yield
- London Stock Exchange Group — 1.3% yield
- Unilever — 3.51% yield
These four stocks alone would give me exposure to the tobacco industry, alcoholic drinks, a world-leading stock exchange, and a company that manufactures and sells a vast range of consumer goods.
Of course, any one of these businesses could cut their dividends if the going gets tough, but that’s a risk I’m prepared to take.
Crunching the numbers
Let’s imagine I secured a 4% yield on my dividend portfolio. I reckon I could enjoy a modest lifestyle on a £25,000 annual income. I’m assuming I wouldn’t pay any tax on that sum, as I’d take advantage of the tax-free benefits of investing in a Stocks and Shares ISA.
At my target yield, I’d need a portfolio valued at £625,000 to live purely off the passive income it would produce. If my holdings grew at a compound annual rate of 7% and I maximised my £20k ISA allowance every year, I’d hit my target in just over 15 years!
The maths is simple, in theory. However, as recent history shows, periods of poor stock market performance can delay my progress, or even send it into reverse. Conversely, in glorious bull runs, the wealth-building process can accelerate.
To work, or not to work?
For me, the idea of living off dividend income is less about escaping work and more about financial freedom. After all, ideally work should be a pleasure, not a chore — and writing for The Motley Fool is certainly an enjoyable endeavour!
But once my expenses are taken care of by dividends, it eliminates the pressure that comes from needing to work for income. So now it’s time to put my plan into action. I’ve set aside some useful reading this weekend as I continue my quest to find the best FTSE 100 stocks to buy.
