To most working people, the idea of giving up the day job to live off dividends paid by FTSE 100 shares sounds like a fantasy. A nice idea, but ultimately not very practical.
However, it is theoretically possible, assuming I have enough money to invest.
For the purpose of this article, let’s imagine I made a large investment in the shares of housebuilder Persimmon (LSE: PSN) and wanted to retire on the dividends they paid me.
How much would I need to invest to make this a reality? Let’s find out.
My calculations
Here, I’m going to use the median annual earnings for full-time employees in the UK. According to Statista, that was around £33,000 last year.
So, clearly, I’m going to need a fair few Persimmon shares to replace that income. But just how many exactly?
Well, City analysts expect the York-based homebuilder to pay out around 66p per share next year.
That gives the stock a forward dividend yield of 6.3%, which happens to be far ahead of the current 3.7% average for Footsie shares.
It means I’d need 50,000 shares to generate my desired sum. As things stand, they would set me back around £525,000.
The good news is that the Persimmon dividend payout could well head higher after next year. In effect, that would be like getting an annual pay rise for doing nothing!
Of course, that’s assuming City forecasts prove to be accurate, which isn’t always the case. And that the housing market doesn’t experience a prolonged downturn, which is looking increasingly possible.
Additionally, as with most income, there would be tax implications I’d likely need to consider based on my personal circumstances.
Interest rate turmoil
The Persimmon share price has fallen by about 63% in the last 18 months. That doesn’t include the return from dividends, but even they wouldn’t have cushioned the blow of such a devastating loss of capital.
The reasons for this decline are well-documented. Soaring interest rates continue to push up mortgage costs and keep many potential homebuyers out of the market. This could eventually send property prices plummeting, which would be disastrous for the firm’s profits.
Another specific issue for Persimmon is the ending of the government’s Help To Buy scheme. The company benefited handsomely from this as it built a large number of houses in areas where the average home price was more affordable. That lucrative demand has now largely disappeared.
Consequently, the dividend was slashed from 235p per share last year to just 60p (which was paid in May). That 74% reduction highlights perfectly why I’d never want to rely solely on a single stock for income.
Would I buy the shares today?
I don’t currently own the shares, though I have been considering buying some with a long-term holding period in mind.
Over time, the fundamentals underpinning demand for new homes in the UK should remain strong. So I think the share price will eventually recover, though when that happens is anyone’s guess.
In the meantime, given the dark clouds swirling above the housing market, I doubt Persimmon will use its cash reserves to fund big dividends next year.
So, I certainly wouldn’t be giving up the day job to rely on this stock for passive income.
