I’ll be retiring in a decade or so, and I’m scrambling to buy shares that will give me a mighty passive income stream when I stop working.
I’m hunting for FTSE 100 blue-chip stocks that will pay me a high income not just today but far into the future. There’s no point getting a rush of dividends in year one, only to see them dwindle to an unreliable trickle thereafter.
So I won’t just go for the biggest dividends I can get. A quick search suggests that Vodafone Group pays the most generous dividends on the Footsie, currently yielding 11.28%. If I poured my £20,000 Stocks and Shares ISA into that one stock, I’d get a blockbuster income of £2,256 in year one.
I need sustainable income
Unfortunately, I don’t trust the Vodafone dividends. The yield is so high because the share price keeps falling and falling. It’s down 26.22% over one year and 50.28% over five years.
Vodafone CEO Margherita Della Valle was appointed in December 2022 with a remit to get the telecom behemoth back on track. These are still early days, but she has a battle on her hands. The group has a market cap of £18.45bn and forecast net debt of €32.88bn in 2024. I think the temptation to save cash by slashing the dividend will eventually prove too hard to resist. The forecast yield of 10.4% is covered just 0.9 times by earnings, half the ideal amount.
Della Valle is offloading non-core operations and working on lucrative tie-ups, including a 10-year strategic partnership with American software giant Microsoft to “bring generative AI, digital services and the cloud to more than 300m businesses and consumers”. Yet I feel, given its financials, that dividend cannot be relied upon. If it was slashed in half, I’d still get a yield of more than 5.5% a year, but I think I can do better.
I would therefore split my £20k ISA between four different companies that offer higher, safer yields. My first two picks would be fund manager M&G, and insurer and fund manager Legal & General Group, which yield 8.69% and 7.67% respectively. While there are never any guarantees when investing, these dividends look safer than most in my opinion.
I’m spreading my risk around
Both stocks are in the financial sector, and have a fair deal of crossover. So I would further spread my risk by investing in mining giant Rio Tinto, which yields 7.07%. Commodity stocks are suffering as the Chinese economy struggles, but Rio has shown its relative strength. Its shares have fallen 13.49% over the last year, while FTSE 100 rivals Anglo American and Glencore crashed 49.25% and 25.49% respectively.
I’d then buy housebuilder Taylor Wimpey, which should benefit when interest and mortgage rates start to fall. That should underpin the housing market, which should boost property sales and prices. The shares currently yield 6.48% and have climbed 25% over the last year. Yet they still trade at just 7.71 time earnings.
Together, these four stocks would give me a combined yield of 7.48%. If I invested £5k in each, I could potentially earn dividend income of £1,496 in year one. If I’m right and their dividends are sustainable, my passive income will rise steadily over time.
