Here’s how to target £350 a month in passive income from FTSE 100 dividends

A selection of dividend shares can be a reliable way to earn passive income. Our writer outlines his criteria and explores some top picks.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One of my favourite ways to earn passive income is with dividends. That’s because once individual shares have been bought, I find that it’s a relatively low-maintenance option.

With dozens of potential options in the FTSE 100, I try to narrow down the selection using a short checklist.

The checklist

For reliable passive income, I’m looking for reliable dividends. That means consistent payouts, which means back-to-back dividend payments every year for many years. More specifically, I look for a dividend history of at least five years. That said, many Footsie shares have consistent payments spanning decades.

Next, I want my income to be affordable to the companies that I invest in. Dividends are typically paid from earnings. So I look if they’re earning enough to cover payouts. This measure is known as dividend cover. More specifically, I look for a cover greater than 1.5.

Last but not least, I look for a dividend yield between 2% and 8%. There are some FTSE 100 shares that offer more than 8% but very high yields aren’t always sustainable, so I’d avoid those.

Top shares for passive income

Some shares that I’d buy for this plan that meet all my criteria include Imperial Brands (7.5% yield), Rio Tinto (6% yield), and Sainsbury (5% yield).

One point to note though. I don’t want to restrict my list to high-dividend payers. Although they would provide me with the largest passive income in the near term, those offering lower dividend yields might end up being long-term winners.

Seeing beyond the yield

Allow me to explain. Footsie-listed BAE Systems (LSE:BA.) currently offers a 2.5% dividend yield. That doesn’t look very special at first glance. But note that its annual dividend has tripled over the past 20 years.

BAE investors from back then now enjoy around a juicy 17% dividend on the price they paid. That’s why dividend growth is an important factor to consider.

BAE offers over three decades of back-to-back dividend payments. In addition, 20 of those years have seen consistent dividend growth.

With a dividend cover of 2.1, I’d say its earnings more than comfortably cover its payouts.

Global spending on defence rose by 7% from 2022 to 2023 and it’s widely expected to continue its upward trajectory amid war and political tensions.

Cybersecurity is also likely to be a key risk to organisations and governments over the coming years. To prevent cyber-attacks, spending in this area is also likely to rise.

BAE is a pioneer in developing new technologies across aerospace, defence, and cyber-security. I reckon it’s well-positioned to capitalise on these trends.

Bear in mind that changing governments can lead to shifts in policy regarding defence. It’s something that I’d keep an eye on globally.

Targeting regular income

To target £350 of passive income every month, I calculate I’d need to invest between £50,000 and £85,000. That’s based on a dividend yield between 5% and 8%.

If I don’t have these sums to invest, I’d make a start by saving and investing every month to build the pot. I’d also reinvest the dividends to speed up the time it takes.

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.

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems, Imperial Brands Plc, and J Sainsbury Plc. 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.

More on Investing Articles

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

As AstraZeneca’s share price dips 4%, is it time for me to buy more?

Despite its 12-month increase, AstraZeneca’s share price appears very undervalued to me, and looks set to rise on strong growth…

Read more »

Investing Articles

FTSE 100 or S&P 500: where should I invest?

UK investors are often drawn to the high growth of US stocks. But there are pros and cons to be…

Read more »

Investing Articles

2 of the best US growth and dividend stocks to consider!

These heavyweight US stocks have been delivering tasty investor returns for decades. Here's why they could remain great picks for…

Read more »

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »