I think FTSE 100 shares are a brilliant way of generating a high and rising passive income. If I was still 25 (I wish!) I’d start building a balanced portfolio of ultra-high yielding UK blue-chips in a Stocks and Shares ISA.
FTSE 100 stocks pay some of the most generous dividends in the world. Currently, the index yields 3.8% a year. The US S&P 500 yields just 1.32% (although US shares are stronger on capital growth).
Some FTSE 100 companies pay incredible rates of income. British American Tobacco (LSE: BATS) yields an astonishing 9.81% a year, for example.
High-yielding assets
In the West, smoking’s in long-term decline as health education campaigns do their work. I’d expect that trend to spread worldwide over time. Obviously, this puts tobacco stocks under pressure. The British American Tobacco share price has fallen 7.28% over the last year.
Yet it’s fighting back by boosting its share of the market, helped by strong brands such as Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans. Management’s also making a push into sectors such as vaping.
I don’t expect the British American Tobacco share price to suddenly go gangbusters, but income of almost 10% a year isn’t to be sniffed at. Other FTSE 100 high-yielders offer higher share price grow prospects, and I’d buy them for balance. I particularly like Lloyds Banking Group and Taylor Wimpey. They yield 5.17% and 6.45% respectively.
Better still, their shares are up 19.78% and 31.34% respectively over the last 12 months, giving me an excellent total return.
Let’s say I could invest my full £20,000 Stocks and Shares ISA in these three income stocks right now. They’d give me an average yield of 7.14% and an income of £1,428 in year one. I think that’s pretty impressive.
I’d reinvest that straight back into the same shares, to build up my position over time. The more shares I own, the more dividends I’ll receive.
FTSE 100 dividend stars
Most companies aim to increase their dividends year after year. If these three manage that I should get a rising income. It’s not guaranteed though. If profits slow or fall, dividends can be cut or even axed altogether. I’d use future ISA allowances to build a portfolio of around 20 FTSE 100 companies to spread the risk.
To boost my chances of success I’d target companies with proven business models, loyal customers, strong brands and healthy potential cash flows. Lloyds and Taylor Wimpey both offer these, in my view, which is why I already hold them in my SIPP.
If I was 25 and starting out, I’d start with these two dividend growth stocks. I have mixed views on British American Tobacco. I don’t hold tobacco stocks on principle, which is a shame because it’s the only thing stopping me from grabbing that staggering yield. Investing is a personal thing. Others may take a different view.
If my stocks compounded at 7% a year, roughly the average long-term total return from the FTSE 100, I’d have £299,489 by age 65. A yield of 7.14% would give me income of £21,384 a year.
That’s not too shabby from a £20k investment. And, with luck, my passive income would continue to grow.
