As the UK’s premier stock market index celebrates its 40th anniversary, it’s worth reflecting on one of the benchmark’s key strengths, namely passive income generation.
While the FTSE 100 woefully underperformed the S&P 500 over the past decade, in terms of capital growth, it’s historically offered a much higher dividend yield. For investors who prioritise earning regular cash payouts from the stock market, the Footsie might be the better choice.
So how much passive income could I earn from a £10k investment? What considerations should investors bear in mind? And are there better opportunities in individual shares?
Let’s explore…
Tracking the index
A good way to invest in the FTSE 100 is to buy units in an exchange-traded fund (ETF) that tracks the index’s performance. The Vanguard FTSE 100 UCITS ETF (LSE:VUKE) is one example.
Currently, this ETF offers a 3.82% yield and each individual unit trades for £33.13. Since it mirrors the Footsie, the fund’s holdings are concentrated in large-cap UK shares featuring in the index.
With a little over £10k to invest, investors could purchase 302 units today. At the current yield, that would produce more than £382 in annual passive income.
Risk and reward
Although dividend payments aren’t guaranteed, investors would benefit from diversification via broad exposure to the FTSE 100. This reduces potential risks from individual companies cutting their payouts.
Plus, it’s worth noting how attractive the FTSE 100 is right now from a passive income perspective. For context, another Vanguard fund, the FTSE All-World High Dividend Yield UCITS ETF (VHYL), offers global exposure to stocks “that pay dividends that are generally higher than average“. Yet its 3.31% yield doesn’t beat the Footsie!
That said, investors seeking growth are likely to be disappointed. Vanguard’s FTSE 100 ETF has only grown 6% over the past five years, excluding dividends.
There’s a cautionary tale in the fact that the best performing FTSE 100 stock last year was Rolls-Royce, which delivered a remarkable 221% share price gain. The British aerospace giant doesn’t currently issue dividends.
A stock to consider
While broad diversification’s important, there are also potentially significant benefits in sifting through the index to identify individual high-yield dividend stocks.
One company I invest in is housebuilder Taylor Wimpey (LSE:TW.), which offers a juicy 6.46% yield. That’s considerably higher than the FTSE 100 average.
Macroeconomic conditions appear to be improving for Taylor Wimpey shares. According to Nationwide’s index, January UK house prices saw their strongest monthly growth in a year, advancing 0.7%.
Furthermore, with interest rate cuts expected later in 2024, mortgage rates may continue to fall. This could alleviate affordability pressures that suppressed housing market activity in 2023.
However, forward dividend cover isn’t as robust as I’d like at just one times earnings. This figure’s well below the two times multiple that generally indicates a wide margin of safety.
Nonetheless, I’m a fan of the dividend policy. It’s linked to assets rather than earnings. Taylor Wimpey aims to “return c. 7.5% of net assets to shareholders annually, which will be at least £250m per annum”.
For investors keen to look beyond the FTSE 100 index at individual dividend shares, I think Taylor Wimpey deserves consideration.
