A common way to earn passive income is to buy dividend shares in blue-chip FTSE 100 companies.
If I buy a share in a company like Tesco, each time it pays a dividend I receive a payment for each share I own.
Imagine I bought 100 shares, for example. That would cost me around £311 at the current price (ignoring fees and commissions, which I would try to manage carefully through my choice of share-dealing account).
Calculating dividend yield
At the moment, Tesco is paying two dividends a year totalling 12.1p per share. If it maintains that payout level, my 100 shares ought to earn me £12.10 in annual dividends. £12.10 is 3.9% of the £311 purchase cost, so we say that Tesco has a dividend yield of 3.9%.
Dividends are never guaranteed though. Tesco has cancelled its payout in the past, when the business went through tough times.
On top of that, though 3.9% is close to the average FTSE 100 yield, some dividend shares offer markedly higher yields. If those yields are sustainable, that could be a good way for me to boost my passive income streams.
With passive income as my objective, here is a handful of FTSE 100 shares I would be happy to buy today for my portfolio if I had spare cash to invest.
Dull but profitable
At the moment, a lot of the high-yield dividend shares in the London market are in the financial services sector. That is not an exciting business field in some people’s opinion, but it can be lucrative.
For example, I would happily buy Legal & General with its 8.1% yield and 10.6%-yielding Phoenix.
Both firms are set to benefit from long-term high demand for retirement-linked financial services products. Both benefit from strong brands (Phoenix owns the rights to the Standard Life brand).
Another company with a strong brand and large customer base I would happily buy more shares in (I already have a stake) is M&G, with its 9.8% yield.
What about risks?
A market downturn could hurt all three, if it sees clients pull out funds. Phoenix’s mortgage book could be negatively affected by a property crash. Legal & General’s growing focus on ESG investing could turn off some investors (although perhaps attracting others). Still, I would be happy to own all three dividend shares.
Consumer focus
I would also add to my holding of British American Tobacco. Despite declining, cigarette sales are still large. The 9.6%-yielding dividend share could also benefit from rising demand for non-cigarette products like vapes.
The fifth dividend share is another I already own: Vodafone (LSE: VOD).
Vodafone plans to halve its dividend. But as its yield is 9.9%, that could still mean the payout is substantial even after the cut.
The company’s balance sheet concerns me. Servicing its debt eats into profits. But asset sales and the dividend cut could help accelerate debt reduction.
Its market is vast and Vodafone has a strong position in many countries across Europe and Africa.I expect demand for data and mobile services to grow over time. I also like Vodafone’s exposure to emerging markets in Africa and see its mobile money offering as an exciting growth opportunity there.
A well-known brand, large customer base and pricing power all play to its advantage.
