I’m a huge fan of passive income — the earnings I make outside of paid work. Happily, the world is awash with extra income, if I know where to look. And at the moment, one particular asset stands out as a bargain buy to me.
Three popular forms of passive income
There are many ways I can generate extra earnings outside of work. For example, earning interest from cash deposits, with table-topping UK savings accounts paying over 5% a year (before tax).
Second, I could invest in bonds — debt securities (IOUs) issued by governments, companies, and other entities. These pay a fixed rate of interest over a defined period. When bonds mature, they also return my initial investment in full (assuming they haven’t defaulted).
Third, I could become a buy-to-let (BTL) landlord, letting out property to tenants. However, this can be hard work and expensive, due to maintenance, repairs, and tenant disputes. Hence, this really isn’t for me.
I love share dividends
For the record, my favourite form of passive income is share dividends. These are regular cash distributions paid by some companies to their shareholders/owners.
One big problem is that future dividends are not guaranteed, so they can be cut or cancelled at any time. Indeed, scores of companies cut their payouts during the Covid-19 crisis of 2020/21.
Another issue is that not all companies listed on the stock market pay dividends. Some firms prefer to reinvest profits into future growth, while others are loss-making.
The good news is that all but a handful of blue-chip FTSE 100 companies pay dividends to shareholders. That’s why the Footsie is my happy hunting ground for extra income.
The FTSE 100 is a dividend dynamo
Currently, the FTSE 100’s total market value is around £2trn and Footsie dividends for this year will be around £77.8bn. That’s a running cash yield of almost 3.9% for this year.
However, investment platform AJ Bell forecasts that Footsie dividends for 2024 will leap to £83.7bn. This generates a forward cash yield of nearly 4.2% next year.
Of course, investing in shares is a risky business. Sometimes, I make losses and get back less than I put in. But as a long-term value/income/dividend investor, my aim is to grab as much of this cash pile as I can.
To do this, my wife and I have invested in FTSE 100 (and US and global) tracker funds that passively follow certain indexes. Also, we have bought 15 different Footsie shares that offer market-beating cash yields.
Of course, I should be wary, because the UK economy is looking weak. Above-target inflation, higher interest rates and rising taxes could put a big squeeze on consumer spending in 2024. But with next year’s FTSE 100 dividends covered around 2.2 times by forecast earnings, that’s a decent margin of safety.
Lastly, more than three-quarters (75%+) of Footsie earnings come from overseas. Hence, I see this index as an ultra-cheap way to invest in global growth, while collecting delicious dividends along the way!
