According to AJ Bell, the 2024 forecast dividend yield for the FTSE 100 is 3.7%. If I was able to achieve an identical return, I’d generate £740 a year in income from a £20,000 investment.
But there are plenty of Footsie stocks offering higher yields.
For example, Phoenix Group (LSE:PHNX) is currently yielding 10.75%. If this was sustained, a £20,000 lump sum would give me a second income of £2,150 a year, or £179 a month.
Phoenix Group is the UK’s largest long-term savings and retirement business with over 12m customers. It has a strong portfolio of brands — including Standard Life and Sun Life — and has been in existence for 240 years. And with an increasing state retirement age, I think it’s well placed to grow over the coming decades.
It also has an excellent track record in growing its dividend, which, in cash terms, is now 43% higher than it was in 2014.
However, at 30 June 2024, it had £95.9bn of equities and £3.9bn of investment properties on its balance sheet. This makes it vulnerable to an economic downturn.
And for the six months ended 30 June 2024, it reported a loss after tax of £646m. If this performance persists, its generous payout could be in jeopardy.
I’d have to do more research before deciding whether to invest in Phoenix Group. But at first glance, its healthy dividend makes it attractive to an income investor like me.
But wait
However, it wouldn’t be a good idea investing in just one stock.
Fortunately, there are other high-yielding opportunities in the FTSE 100.
There are presently 13 shares offering a yield in excess of 6%. The average of these is 7.9%. Applying this level of return to a £20,000 stake would generate £1,580 — or £132 a month — in dividend income.
But instead of banking this amount every year, I could use it to buy more shares.
In year two, the £1,580 could earn me another £124.82. This would then give me £1,704.82 to invest in year three. And so on. This is known as compounding. It’s been described as the eighth wonder of the world.
And by taking a 40-year investment horizon, I can see why it’s so popular. That’s because repeating this exercise for four decades would turn an initial £20,000 into £418,685.
A 7.9% yield on this amount would generate passive income of £33,076 — £2,756 a month.
But this is only half the story.
History suggests that FTSE 100 stocks will also appreciate in value. Since inception, the Footsie’s grown by an average of 5.2% a year.
A reality check?
But this analysis carries a number of health warnings.
Firstly, history doesn’t necessarily repeat itself. This means dividends (and capital growth) are never guaranteed. I’m sure the FTSE 100 will look very different in 40 years’ time to what it does today.
And an initial sum of £20,000 is a lot of money to find. Although investing little and often will achieve similar results, it would take far longer to generate a four-figure second income.
But despite these caveats, this theoretical exercise does highlight how — by taking a long-term view — it might be possible to generate a healthy level of passive income from FTSE 100 stocks.
