We’ve had a terrible decade for shares on the UK stock market. But the best time to invest for passive income is when shares are cheap, isn’t it?
Most FTSE 100 companies are doing fine, and they’re generating lots of cash to pay dividends.
Forecasts suggest the Footsie could pay out around £84.8bn in dividends this year. That wouldn’t match the all-time record set in 2018. But if they’re right, dividends in 2024 should smash through it and reach new heights.
And that’s only ordinary dividends, with no specials attached. It also doesn’t cover cash returned via share buybacks, which a lot of firms are doing this year.
Buybacks bonus
Buybacks reduce the number of shares in existence, and companies can then spread future dividends less thinly, boosting the per-share cash.
What this all suggests to me is that FTSE 100 firms are awash with cash. And I’d like to see a bit of it head my way in passive income.
Interestingly, according to a survey by investment firm AJ Bell, financial stocks should lead the way this year. They look set to account for a whopping 55% of forecast FTSE 100 profit growth in 2023.
To be cautious, these estimates are from a couple of months ago. Since then, inflation and interest rates have turned out more painful than hoped.
Finance risk
Banks must face increased risks of losses through bad debt now. And that could put pressure on their dividends.
But they’re also earning bigger interest margins on their lending. And a quick look shows several of them are enjoying the share buyback party right now.
I just don’t see the future for the UK’s banks, and shares in general, to be as gloomy as the party-poopers fear.
And I’m not alone. The latest Investor Index survey found that investor confidence has reached its highest level since the pandemic.
Which dividends?
So which dividend stocks would I buy right now? It looks like there are nine FTSE 100 stocks forecast to deliver dividend yields of 8%, or more. And that, I think, could make for a cracking passive income.
They’re mainly in the investment, insurance, housebuilding and tobacco businesses. So I think I’d start with one from each of those.
The banks don’t make the top 10. But we’re looking at yields of 5-6% from those. So I’d add a bank to my list.
And then I might go for a miner now they’ve fallen back a bit. I see a couple on about 7%.
Diverse selection
So that’s six stocks from a range of sectors and I’m well on my way to a diversified passive income portfolio.
However, I don’t want to downplay the risks. And the main one is that dividends can be, and often are, cut. So that’s why I’ll stick to businesses where I see long-term cash generation. And I’ll just swallow the occasional dip when it comes along.
And even in the tough past decade, income investors still pocketed some decent dividends. If we’re heading towards a new long-term period of growth, I think things can only get better.
