Generating passive income from the stock market isn’t hard. I could simply buy a fund that tracks the return of the FTSE 100 while also paying dividends.
As things stand, this strategy would deliver a decent yield of around 3.9%. However, I can potentially collect (a lot) more if I’m willing to buy individual company stocks from the same index.
Monster yield
Shares in financial services provider Legal & General (LSE: LGEN) have sunk to a 52-week low. With the global economy looking sluggish at best, that’s hardly surprising.
On the flip side, a falling share price means a higher dividend yield. As I type, this stands at almost 10%.
Tellingly however, the stock is down almost 20% in value year-to-date. By contrast, the FTSE 100 is down only a couple of percent.
So does this monster return justify taking on the extra risk? I’m inclined to say it does.
While shares might sink lower if further rate rises are announced, Legal & General already trades on just nine times FY23 earnings. So I reckon quite a bit of negativity is already priced in. Moreover, I suspect the yield would remain pretty punchy even if a cut was made.
Longer-term, the company stands to benefit from a huge rise in the number of retirees as populations age. This should mean its solid record of raising payouts on an annual basis will continue.
Digging for dividends
Since dividends can never be guaranteed, it makes sense to spread my money around different sectors when looking to create a second income stream. For this reason, another high-yield stock that takes my fancy is miner Rio Tinto (LSE: RIO)
As well as operating in a completely different part of the market from L&G, Rio digs for a diverse group of vital materials including aluminium, copper, iron ore and lithium. The latter could act as a buffer in case one or two metals temporarily lose their shine, price-wise. That said, a prolonged fall in demand from heavy metal buyers like China is a clear risk here.
However, the stock already trades on a similar rating to L&G and yields 7% for FY23. Importantly, the latter is after a cut to the interim dividend was announced in July.
Sure, current analyst forecasts may still need to be revised. Even so, I’m confident Rio will still deliver a market-beating yield.
Power play
A final high-yield pick is power provider National Grid (LSE: NG). For me, the Grid is one of the first companies to spring to mind when it comes to hunting for dividends.
The essential nature of what it does translates to relatively stable earnings that help to support a yield that’s a good deal bigger than that offered by the index. Right now, this stands at just over 6%. Analysts expect payouts to rise even higher in FY25 (which begins in April 2024).
Half-year results are due on 9 November and I don’t expect too many nasties. Then again, it’s worth noting that a high interest rate environment is generally not good for companies with debt piles as sizeable as National Grid’s.
Nevertheless, I’d feel comfortable buying now if I had the spare cash to do so. A valuation of 14 times earnings is already below the five-year average of 18 on this stock.
