The FTSE 100 is an index made up of some of the biggest businesses in the UK. Quite a few of them are also generous dividend payers. For example, Vodafone currently yields about 10%. That means if I put £100 into its shares today, I would hopefully earn £10 in dividends each year.
At the moment the FTSE 100 has an average yield of 4%. But shares like Vodafone are yielding a lot more than that average.
If I had a spare £8,000, here is why and how I would put it into such shares today to aim for annual passive income of £5,000 over the long term.
Looking to the future
When I say long term, I mean it.
With the sorts of yields on offer today from FTSE 100 shares like M&G and Legal & General, I feel comfortable aiming for a 7% average yield.
But investing £8,000 at a 7% yield would earn me only £560 each year. That is passive income, but is far from my annual target of £5,000.
However, if I reinvest the dividends instead of taking them as cash (something known as compounding) then I ought to hit my passive income target after 34 years.
Yes, it is a long-term project. But I think the wait is worth it, if I can end up earning thousands of pounds year after year in passive income for just £3 a day. Alternatively, if I was willing to settle for less, I could simply take the dividends as cash all along instead of compounding them.
Getting started
How would I put such a plan into operation?
As a new year approaches, lots of people make plans that never come to anything. So I would start today by taking some concrete steps to help make my passive income plan become a reality.
I would set up a share-dealing account or Stocks and Shares ISA. That would mean I could start putting aside my daily £3 and have it ready to invest.
Then I would learn more about how the stock market works.
By getting to grips with companies’ financial reports – typically available online – I could start to decide which FTSE 100 shares look attractive to me in terms of future dividend potential.
Building a share portfolio
Of course, yields may not stay as high as they are now.
My compounding example above is based on constant yields and share prices, but in reality both could move around. That might work against me, but if I am fortunate it could work in my favour. If I find the right shares to buy, not only might I earn juicy dividends in 2024, but they could get bigger as the years go by.
Rather than being greedy, though, I would focus on the quality of the companies in which I was investing and their current valuation.
If I made smart choices, hopefully I would be rewarded in future by earning thousands of pounds in passive income, year after year.
