I want to build for a decent passive income. And I doubt I’ll do better than buying FTSE 100 dividend shares.
Well, I also see a lot of cheap FTSE 250 shares too. And those smaller stocks could also help build up my pot. After all, the smaller index has a habit of beating its bigger sibling in growth terms.
But today, I want to think about how I’d aim for my target with what I see as super-cheap FTSE 100 stocks. And I’ll do some sums to see how I might get there with Lloyds Banking Group (LSE: LLOY) shares.
Top FTSE 100 dividends
Just going for the stocks with the biggest yields might not be the best idea. No, I also want to see solid cash generation that I think will keep going for the long term.
I don’t mind a few short-term ups and downs. So cyclical sectors like insurance and mining are fine by me. Just as long as I see good income prospects for the next 20 years, or more.
That helps make Phoenix Group Holdings one of my passive income candidates. The 10.5% dividend won’t be covered by earnings for the next couple of years, according to forecasts. But in the long term, I think the cash should be there.
And even investing just £100 a month for 20 years at 10.5% a year could compound to more than £75,000.
Long-term risk?
British American Tobacco is another big dividend stock with the cash to cover it. There’s another 10% yield here, and £100 a month into that could grow to more than £70,000 in 20 years.
We’d have to weigh up the long-term risk for the industry though. But I think the fear is overblown.
Anyway, what about Lloyds shares? The forecast dividend is lower, at 6.1% this year. We do face another tough year for banks in 2024. And as it’s the UK’s biggest mortgage lender, Lloyds is under pressure from the property market too.
I still see a good chance of the Lloyds dividend growing in the long term though. But for now, let’s just stick with that 6.1%.
£10k per year
To earn £10k a year from Lloyds shares, I’d need a pot of them worth close to £166,000. At today’s price, that’s nearly 400,000 of them.
But if I invest £360 a month, I could get there in 20 years. That’s £4,320 a year, way less than the Stocks and Shares ISA limit of £20k.
Someone who could use their full allowance could reach their £10k passive income goal in just eight years. Or if I had 30 years ahead of me to invest, I’d do it with just £180 a month.
Diversify
However, I wouldn’t want all my money in one stock, so I’d diversify. And the real numbers aren’t going to come out quite like this.
But starting an ISA with Lloyds, Phoenix Group, and British American Tobacco… well, I think that could be a good start towards my annual £10k income target.
