The main reason I buy FTSE 100 shares is that they give me a high and rising stream of passive income without me having to work for it.
Once I’ve selected a portfolio of top dividend-paying stocks, I can basically leave them to it. I’ll need to check up on them from time to time, to see if they’re still performing and paying the dividends, otherwise I can largely leave them be. All my other income I have to work for.
Today, I’m reinvesting all my dividends. But when I stop working, I’ll start drawing them as a second income to top up my State Pension.
Dividend stocks for me
If I had £12,000 to invest today, I’d be scouring the FTSE 100 for great income opportunities, although it wouldn’t take me long. There are so many dividend stocks I’d love to buy today, if I had the cash.
I’m already getting a blockbuster yield of 10.05% from Insurance conglomerate Phoenix Group Holdings, 8.75% from fund manager M&G and 7.6% from insurer Legal & General Group.
High yields like these can be risky, as they can be unsustainable. Nothing is guaranteed when investing.
L&G, for example, has been hit by volatile stock markets. First-half 2023 operating profits dipped slightly from £958m to £941m, with profit after tax plunging 45% from £575m to £316m. That has weighed on the share price, which is up just 0.39% over the last year.
Yet management remains committed to the dividend and is generating more than enough cash to pay it. L&G is also financially strong, with a Solvency II coverage ratio of 230% and £9.2bn surplus. Its share price will hopefully revive when interest rates fall and stock markets finally recover.
At that point, savings rates and bond yields are likely to fall, making high-yield dividends stocks like this one relatively more attractive L&G looks cheap today, trading at 6.56 times earnings. And I do like a bargain. We’ll know more when 2023 full-year results are published on 6 March.
My dividends should rise, in time
Today, those three stocks would give me an average yield of a pretty handy 8.8% a year. If I invested £4k in each, my total £12k investment would hopefully generate income of £1,056 in year one.
Yet I’m not investing to generate income for just one year. I want it for life.
If retirement was 30 years away, and my yield held firm at 8.8% throughout, my £12k would grow to a pretty impressive £150,677 – and that’s with zero share price growth.
If I average a total return of 12% a year, including share price growth, that would rise to £359,519. My 8.8% yield would then give me income of £31,638 a year. Not bad from a £12k lump sum.
There are a lot of ‘ifs’ in there. Dividends can be cut at any time. Share prices can fall as well as rise. Nobody knows if these three companies will even exist three decades hence.
However, my crude sums do show one point. High yielding dividend income stocks may never smash the market, in the way US tech has, but can steadily build wealth over time.
I’m building a far broader portfolio to spread my risk, and hope to generate a lot more passive income as a result.
