What a time to invest for passive income! While the FTSE 100 has struggled to deliver sustained growth, companies listed on the index keep pumping out those dividends.
Currently, the lead index yields income of around 3.75% a year. That’s what I’d get if I bought a tracker, but I wouldn’t. I prefer to select individual stocks on the index, to generate an even higher level of income.
The index is packed with them. A staggering 14 stocks currently offer yields of 6%, or more. Of these, nine yield more than 8% a year. That kind of income can offer serious protection against the ravages of today’s inflation.
Lots of great income stocks
Inflation is proving hard to contain and was stuck at 8.7% in May, far more than even the best savings account pays. Yet four high-yielding FTSE 100 stocks would still me pay an inflation-busting passive income.
Housebuilder Taylor Wimpey currently yields 8.72% a year. Insurer Phoenix Group Holdings easily beats inflation by yielding 9.29%, wealth manager M&G yields 9.97% and Vodafone Group offers 10.37%.
I should point out that dividends are never guaranteed and the higher yield, the more vulnerable it’s likely to be.
Yields are calculated by dividing the dividend per share by the share price, which means that when the stock falls, the yield naturally rises. Accordingly, I wasn’t surprised to see all four of these stocks have had a poor year, share price-wise.
Taylor Wimpey is down 8.53% over 12 months, while Phoenix is down 10.16% and Vodafone has crashed by 41.17%. Of the three, only the M&G share price is trading higher than a year ago, and it’s up just 1.34%.
If I divided this year’s £20,000 Stocks and Shares ISA allowance equally between these four stocks, I’d get an average yield of 9.59%, comfortably above inflation. That would give me income of £1,918 a year, which is possibly the highest yield I could generate from my ISA.
And that’s just in the first year. If these companies increased their dividends over time, I’d expect to generate a lot more.
In 2022, Taylor Wimpey hiked its dividend per share by 9.6% to 9.4p. Phoenix also lifted its shareholder payout by 3.9% to 50.8p per share. M&G increased its total dividend per share 7% to 19.6p. Vodafone was the only one of the three that didn’t hike, holding its dividend at €0.9 a share for the last five years. Given its outsize yield it’s hard to complain about that.
I can beat inflation
Whether all four can hike again in 2023 as the UK economy struggles is a moot point. Vodafone’s looks particularly vulnerable. If we get a full-blown house price crash, then Taylor Wimpey may disappoint dividend seekers too. Any investment can underperform and I could even lose money.
So what am I doing? Well, I already hold M&G and want to buy more, and I’ll buy Taylor Wimpey when inflation and interest rates ease. Phoenix is on my watchlist, but I’m wary of Vodafone, which is in dire need of an overhaul.
I’d top up my stake in Legal & General Group first. Given that L&G yields 8.47%, my passive income stream will still beat inflation overall. I should do even better when price rises finally start to slow.
