The FTSE 100 is a ‘no brainer’ choice for many looking to invest their hard-earned cash. London’s premier UK share index is packed with established, market-leading companies with strong balance sheets and healthy earnings prospects.
This can make them excellent ways to make a large and consistent passive income. However, the Footsie’s not all about dividends. Many British blue chips have significant growth potential, and therefore the potential to generate substantial capital gains.
Having said all that, the returns on FTSE 100 tracker funds have been put in the shade by those focused on overseas indexes more recently. So how much could someone investing £10,000 in Britain’s number one index expect to eventually make in passive income?
Better options
Since 2015, someone investing in a Footsie-tracking exchange-traded fund (ETF) would have made an average annual return of around 6.2%.
That’s not bad. But this person could have achieved a far better return by investing in US and European shares instead.
Over the past decade, S&P 500-tracking funds have delivered an average return of roughly 12.5% a year. Meanwhile, funds tracking Germany’s DAX and France’s CAC40 have delivered returns of around 6.8% and 7.9%, respectively.
I’m not saying that the FTSE 100 is a bad place to consider parking one’s cash. Indeed, the return on UK large-cap shares is far better than those delivered by some other global indexes.
For those seeking significant returns, I think purchasing individual shares could be the best way to go. Ashtead Group (LSE:AHT) is one I think is worth serious consideration today.
Star performer
Ashtead has enjoyed spectacular earnings growth by supplying rental equipment primarily to the construction industry. Sales have rocketed over the past decade thanks to rapid site expansion, helped in large part by acquisition activity. It now operates around 1,150 stores — most of which are in the US — versus 640 in early 2015.
Earnings growth has been impacted by higher interest rates more recently, as illustrated by its flatter share price. But as inflation falls, it’s hoped that central banks will slash rates in 2025 and beyond to resuscitate Ashtead’s end markets.
I’m optimistic, too, that Ashtead will rebound as the US accelerates infrastructure spending under President Trump. The FTSE firm also has further significant room for expansion to get profits chugging higher again.
Targeting a £42k passive income
Past performance is no guarantee of future returns. But if the company serves up the same 17.9% average annual return as it has over the past decade, a £10k investment today would eventually turn into £849,406 after 30 years.
Investing this into 5%-yielding dividend shares would then provide a yearly passive income of £42,470.
That’s far higher than the £2,346 someone who invested in a FTSE 100 tracker would enjoy, based on the index’s 10-year performance. That person would have made a much reduced £46,927 after 30 years.
I hold a number of individual FTSE 100 shares in my own portfolio, including Ashtead, rather than owning a tracker fund. It’s a strategy I plan to continue.
