Putting some money aside today could help me earn money far into the future, depending on how I invest it. With some high yields currently on offer from blue-chip FTSE 100 companies, I think a spare £15,000 invested today could realistically earn me £1,000 or more in dividends each year for the rest of my life.
Here’s how.
Laser focus on quality
Being a member of the FTSE 100 does not necessarily mean a business is a good one. The index is compiled on the basis of stock market valuations. Companies can be overvalued and their prospects can change over time.
However, I do think there there are lots of great quality FTSE 100 businesses currently selling at attractive valuations. That offers me a buying opportunity.
As I would be investing for the long term, I want to buy into companies I think could do well for decades to come. So I would focus on buying stakes in excellent businesses.
Blue-chip quality
An example of a share I have bought this year on that basis is Legal & General.
With a large market of potential and current customers, I expect demand for the sorts of financial services provided by the company to be large and robust. With an well-known brand, large existing customer base and deep experience of investment management, I think Legal & General has certain business characteristics that could give it a long-term competitive advantage.
Diversification
I could turn out to be wrong though. Maybe a recession will reduce demand for financial services, hurting revenues and profits at Legal & General. Or perhaps some other unforeseen risk will cause problems for the business.
To reduce the potential impact of such risks on my investments, I always diversify across multiple firms. £15,000 is ample to do that. I could spread the money evenly, putting £3,000 into each of a handful of FTSE 100 companies.
Target yield
Doing that, I feel I could hit my target. To earn £1,000 a year from a £15,000 investment, I would need to earn an average dividend yield of 6.7%, or higher.
Legal & General is just one of quite a few lead index companies currently offering such a yield. Others include British American Tobacco, M&G and Vodafone.
My focus is on buying into great, quality companies. But it could be a costly mistake to buy a share for yield alone. FTSE 100 companies can cut their dividends just like any others. So I always focus on quality first and only later consider yield.
Lifelong income
With dividends never guaranteed, my target of earning a lifelong passive income is not assured. But I think it is realistic and indeed I would hopefully earn more after time, from only my £15,000 initial investment.
Diversifying while focusing on quality companies should help to reduce the risk a dividend cut by one firm would pose to my income.
Great businesses ought to increase their earnings over time. That can translate to higher dividends. For now, I am focused on finding such businesses!
