I think one of the best ways to make a long-term passive income is by investing in FTSE 100 stocks. The UK’s premier share index is packed with companies whose proven business models and cash-rich balance sheets make them brilliant stocks to buy.
Stock investing can be a bumpy ride at times. As we saw during the Covid-19 crisis, even the most reliable and financially robust company can slash or cancel dividends, as well as slump in value.
However, history also shows us that a carefully created and well-diversified portfolio of shares can — over the long-term — deliver significant passive income streams.
Talking tax
Let’s say that I’m at the beginning of my investing journey. I have a decent £9,000 ready to invest in FTSE 100 shares, and plan to spend a few hundred pounds extra each month to boost my retirement pot.
The first thing I’d do is set up a tax-efficient Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP). Unlike a general investment account, these products allow me to build wealth without the threat of income tax or capital gains tax hanging over my head.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Over the long term, an ISA and/or SIPP could save me a fortune in tax payments.
Steps to success
With this step complete, I’d then begin selecting stocks to buy using some tried-and-tested investing principles.
I’d look to spread that £9,000 lump sum across a variety of companies to mitigate risk. I think three to five different stocks would be a good number to start out with. I’d then build out the number of companies I’m invested in with my additional monthly payments.
I’d also seek out companies with sustainable competitive advantages that sets them apart from rivals. Strong balance sheets, competent management teams, and industry trends are other key things I consider.
I’d also make sure I’m not overpaying for any share I buy. I’ll use metrics such as the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio and discounted cash flow models to help me identify value for money.
A top stock to buy
Aviva (LSE:AV.) is one FTSE 100 share to consider, based on this criteria. It’s why I already own it in my Stocks and Shares ISA, and I’m looking to increase my stake when I next have cash to invest.
The financial services giant has one of the strongest brands in the business and a history of creating market-leading products. It’s why the company’s the UK’s biggest provider of both life and general insurance products.
Aviva also has a cash-rich balance sheet it can use to pay dividends and invest for growth. And its shares look dirt cheap on paper. They trade on a forward P/E ratio of 10.6 times and carries a 7.5% dividend yield.
A £24k+ passive income
Competition’s fierce in Aviva’s markets, which is a big threat. But I still think it could help me achieve a 7.5% average annual return, in line with the broader FTSE 100.
If I can hit this target, a £9,000 lump sum — supplemented with a £300 monthly investment over 30 years — would turn into £489,027. I could then draw down 5% of this amount each year for an annual passive income of £24,451.
