Investing in FTSE 100 dividend stocks is a brilliant way to generate passive income, especially today when so many are trading at dirt cheap valuations.
If I had a £20k savings pot, I’d take this opportunity to build a portfolio of shares that will pay me a high and rising yield over time.
If I start early and stick at it, my £20k could end up producing passive income of more than £14k a year, depending on how well my stocks perform.
Although this is undoubtedly a scary time to invest in shares, as inflation won’t stop and share prices slide, ironically, times like these are often the best rewarding, as valuations are low.
This requires a long-term view though. I’m not going to produce a £14k income from a £20k stake overnight.
I’m looking to the future…
I would feed my £20k into FTSE 100 shares over what the summer, taking advantage of any further stock market dips. Need I say that I’d invest via my Stocks and Shares ISA allowance, for tax-free returns?
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I’d start by feeding £5k into a low-cost index tracker such as the Vanguard FTSE 100 UCITS ETF, which currently yields 3.88% and charges just 0.09% a year.
That would spread my risk across the entire index. Then I’d invest the remaining £15k in individual high-yielding shares, to generate a higher level of income.
Personally, I’m looking to buy the following three dirt cheap, high-yielding shares this summer. I like mining giant Rio Tinto, which currently yields a thumping 7.79%, but is valued at just 7.7 times earnings (around 15 times is typically seen as fair value).
I’m planning to take advantage of property market disarray by purchasing housebuilder Taylor Wimpey, which yields 9.1% and trades at 5.4 times earnings. Wealth manager M&G has been hit by today’s stock market volatility but should recover when investor sentiment picks up. It yields a barnstorming 10.63%.
…But I’ll have to be patient
Yields are never guaranteed and high yields can prove particularly fragile, yet these three look more solid than most. As with any stock, I would never invest with less than a five-year view, and ideally much longer than that.
I’d put £3k into each of these three, then buy more dividend stocks with my remaining £6k to further spread my risk.
Starting at age 30, my £20k would have 37 years to grow before retirement. History shows the FTSE 100 has delivered an average long-term return of 6.89% a year with dividends reinvested, which would turn my money into £235,343. I could end up with more (or less, of course).
If my portfolio yields 6% a year, I’d have income of £14,121 a year. Not bad from a £20k stake. Obviously, that income will be worth less in real terms, due to inflation. But then I wouldn’t expect to fund a comfortable retirement purely by investing £20k, and would add to it year after year.
What my sketchy figures show is that the stock market can turn small sums into much bigger ones, provided I give it time to go to work.
