The FTSE 100 has an average dividend yield of 2.92%. Given that the base interest rate’s 3.75%, some might feel that buying stocks for dividend income isn’t a smart idea. However, building an impressive passive income can be done in such a way to achieve a high yield without an excessive level of risk. Here’s what I’m talking about.
Active selection
There’s a huge range of stocks within the index. Some don’t pay any income, whereas other stocks have yields as high as 8.32%. This means that buying a tracker fund that pays out the income isn’t really the best way to capture the best yield. For a start, an active investor could cut the 10 stocks that pay a yield less than 1%. I don’t see much value in having them in an income portfolio. Instantly, that boosts the average dividend yield.
Yet the person could go even further and select a dozen-or-so companies. In this way, it’s still diversified enough to limit any damage that could happen if one company cuts the divdiend. Yet it also allows the average yield to be higher. Based on the stocks involved, I think a yield of 6% could be achieved.
If someone were to invest £300 a month in this portfolio, it could steadily build over time. In year-15, it could pay out £4,997 just in dividends. The pot at the end of the year would equate to £87,981. From there, the investor could either decide to stop paying more money in and enjoy the dividends, or let it compound further.
Of course, dividends aren’t guaranteed. The main risk to this idea is that several picks underperform, meaning that the portfolio doesn’t reach the target goal as soon as expected.
A stock with the target yield
One stock that could be considered as part of this concept would be LondonMetric Property (LSE:LMP). It currently has a dividend yield of 6.01%, with the stock up 10% in the last year.
As a real estate investment trust (REIT), it has to pay out a certain minimum of profits to shareholders as a divdiend. Therefore, I’m confident that some form of income will be paid for years to come. In half-year results out in November, dividend was raised to 6.1p, up 7% year-on-year. In terms of sustainability, the cash cover for the divdiend was 111%. This means it doesn’t have cash flow problems in paying it out.
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The firm has increased its dividend for 10 consecutive years. To me, this underlines a shareholder commitment, and although the past doesn’t predict the future, the track record can give investors confidence going forward.
In terms of risks, the REIT’s exposed to interest rates. After all, it takes on debt to fund new projects. If the interest rate in the UK doesn’t fall as much as we expect it to this year, it could cause investors to readjust their expectations for debt servicing costs for LondonMetric.
Ultimatley, I think it’s a good stock to consider for a long-term passive income plan.
