How I’d invest £10,000 to target £1,010 a year of passive income

Our writer explains how he’d seek to generate over £1,000 of passive income each year (and some capital growth) by investing in two FTSE 100 stocks.

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If I had a spare £10,000, I’d use it to generate passive income and invest in two high-yielding FTSE 100 shares. But high returns could indicate a potential problem.

Investors might be expecting a cut in dividends in anticipation of falling profits. Potentially volatile earnings means payouts are never guaranteed.

However, I think the dividends of my picks are reasonably secure. And I’m expecting some capital growth too.

Vodafone

Since November 2019, Vodafone (LSE:VOD) has been paying its shareholders 4.50 euro cents, every six months. At current exchange rates, this implies a yield of 12.1%.

The consensus of analysts is for its annual payout to fall to 7.79 euro cents, for the year ending 31 March 2024.

But I disagree. If there was going to be a cut, I think it would have been made when the new chief executive took over in January 2023.

NatWest Group

In respect of the year ended 31 December 2023 (FY23), analysts are expecting a dividend of 16.8p a share from NatWest Group (LSE:NWG).

If they’re correct, the stock’s currently yielding 8.1%.

Based on these figures, if I split my hypothetical £10,000 equally across the two shares, I could receive passive income of £1,010, over the next 12 months.

But I also think there’s a good chance that both will increase in value.

A fallen giant

Vodafone’s stock is currently close to its 52-week low.

Its price-to-earnings ratio is less than Europe’s three biggest telecoms companies.

For several years, it’s been suffering from stagnant revenues and falling earnings. It’s a sad decline for what was once the UK’s most valuable listed company.

But it’s embarked on a turnaround plan and intends to dispose of its operations in Italy and Spain. In these markets, the return is less than the cost of funding its activities.

Critics point to its huge debt as being a problem. But I think the sales proceeds from its restructuring will likely be used to reduce this burden.

Good value

The government’s expected to sell its remaining stake in NatWest soon.

Due to the size of its shareholding, it’s likely to be offered to the public. This is reminiscent of some of the privatisations of the 1980s.

The timing could be driven by the consensus forecast of analysts that predicts NatWest’s financial performance will worsen in FY24, compared to FY23.

Of course, these ‘experts’ might be wrong. But I think it’s worth looking at their predictions.

With interest rates expected to fall soon, the bank’s income, margin and post-tax earnings are likely to be adversely affected in FY24.

And another hit is forecast from an increase in the number of defaults on its loans.

METRIC2023 (FORECAST OUTTURN)2024 (FORECAST)2025 (FORECAST)
Net interest margin (%)3.042.872.93
Loan impairment rate (%)0.180.300.28
Return on Tangible Equity (%)15.612.813.5
Total income (£bn)14.60713.91214.433
Profit after tax (£bn)4.0873.4383.776
Source: company-compiled analysts forecasts

However, the bank’s expected to grow again in FY25 — although income and earnings are forecast to be lower than for FY23.

But I think NatWest’s stock is currently cheap. Its price-to-book ratio is 0.52. And its shares trade on a multiple of 4.8 times its forecast 2025 profit.

Also, its dividend is predicted to increase to 18.2p a share, for FY25.

It’s always important to do thorough research before buying a stock. But I think now’s a good time to consider buying shares in a bank that’s cheap and holding them for the long term. Unfortunately, my lack of cash means I’m unable to take advantage of this opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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