Investing in income shares is a fantastic way to start earning passive income. But exactly how much money can investors earn from this strategy?
For example, let’s say someone has a £10,000 lump sum of cash sitting in the bank that they don’t need for the next few years. To figure out how much money would be flowing into their account, it’s important to first explore what the options are.
Index funds vs income stocks
The easiest and simplest way of putting money into the stock market is leveraging index funds. These are highly diversified instruments which allow investors to indirectly own a small piece of every company in the underlying index. And here in the UK, the most popular one is the FTSE 100.
Right now, the FTSE 100 offers a dividend yield of 3.34%. So putting £10,000 to work this way would instantly unlock a passive income of £340 a year. That’s not a life-changing sum, especially since high-interest savings accounts currently offer a similar level of return at a significantly lower level of risk.
However, since dividends typically grow in line with earnings, if the companies in the FTSE 100 excel, that payout could steadily increase over time. By comparison, continued interest rate cuts will likely see the opposite happen for savings accounts.
Yet, investors can also choose to buy shares in individual companies directly. And even within the FTSE 100, there are plenty of higher-yielding opportunities to pick from right now.
Exploring yields
Persimmon (LSE:PSN) is one of Britain’s leading homebuilders. And while the stock has underperformed over the last 12 months, dividends have kept flowing with a more impressive 5.1% yield.
This price weakness comes as a result of a lacklustre investor sentiment surrounding the business. Input cost inflation of raw materials is putting pressure on the group’s profit margins. This is only exacerbated by the higher interest rate environment that’s dampening home buying and, in turn, home building activity. And the latest underwhelming economic growth figures aren’t exactly helping the situation.
Having said that, the income stock’s showing signs of improvement. New home completions are on the rise. And with management switching tactics to focus largely on affordable housing, a large chunk of its customer base is first-time buyers.
That means the company’s better positioned to benefit from government homeownership support schemes. And with planning reforms encouraging more home-building activity, the company could enjoy sustainable long-term tailwinds once the macroeconomic landscape improves.
What does this mean for income?
At today’s yield, investing £10,000 will generate a passive income of £510. But if the analyst forecasts prove accurate, this could grow to £565 (an 11% boost) over the next two years. Obviously, that depends on the general performance of the British housing market. But with this income stock now trading at a price-to-earnings ratio of 14.7, this seems like an opportunity worth exploring further.
