With rising mortgage interest rates affecting homeowners and renters, the UK is likely approaching another crisis. For savers though, there could be a way to counteract climbing costs.
Let me explain. If I had a lump sum available in savings, I could invest it in FTSE 100 shares to earn a regular passive income. Yes, in principle I could use this to further pay off my mortgage. But investing in shares gives me the opportunity to generate both capital gains and regular income.
Several Footsie shares offer dividend yields above 8%. As an example, if I had savings of £30,000 invested in high-yielding FTSE 100 stocks, I could earn over £2,400 a year in dividends.
At £200 a month, that could certainly help with my mortgage or rent.
Picking FTSE 100 shares
On average, the FTSE 100 offers a dividend yield of 3.8%. To achieve over 8%, I’d need to select some individual shares.
Picking shares can involve more risk as companies are often faced with challenges that affect current and future earnings. But by being aware of a few factors to look out for, the extra rewards could be worth the additional risk.
One way to reduce risk is from diversification. By owning a selection of shares from different industries, I can avoid putting all my eggs in one basket.
Next, I’d look for shares that have a long history of distributing dividends to shareholders. Those that have been doing so for over a decade sound far more reliable than those that have just started.
Affordable dividends
I’d look for solid business models that I think are likely to maintain or grow earnings over several years. At the top of my list would be profitable companies and those with strong brands.
The FTSE 100 index offers many established firms that have been in business for many decades. It’s a factor that can provide investors with some comfort.
Dividends should comfortably be covered by a company’s earnings. This metric, known as dividend cover is a key method to determine affordability.
Note that cash payments aren’t guaranteed, and they can be cut or suspended by management. But a large dividend cover can create a buffer and reduce these risks.
8% dividend yield
So now that I’ve outlined what to look out for, which FTSE 100 shares fit my criteria?
If I had spare cash right now, I’d buy Legal & General, Aviva, Imperial Brands, HSBC Holdings, and Rio Tinto. These five shares currently offer an average yield of 8%.
They’re all well-established and large businesses that have consistently been distributing cash to shareholders for many years. On average, they have a 26-year history of consecutive payments.
With an average dividend cover of 1.8, I’m comfortable that they’ll be able to afford payments and that the risk of a cut is small.
Overall, I’d say that dividend income could offer a way for investors to tackle higher mortgage costs or rent. It’s not without risks, but by being aware of the above points, I’d expect it to work out in the long run.
