While the State Pension may be unable to provide financial freedom for many retirees, the FTSE 100 could provide you with an appealing passive income in older age.
The index currently contains a variety of stocks that operate in a range of industries which offer inflation-beating income returns. Buying a number of them could also offer a degree of diversity in order to reduce overall risk.
Although investing in the FTSE 100 comes with a risk of capital loss, for long-term investors, the index could provide growth alongside its impressive dividend prospects.
Diversity
The vast majority of the index’s members currently have dividend yields that are in excess of the current rate of inflation. As such, it is possible to obtain a positive real-terms income return that may not be available through holding cash or bonds.
Furthermore, having a wide range of stocks that operate in different sectors could prove to be crucial for an investor who is looking to generate a passive income in retirement. A larger range of holdings could reduce company-specific risk so that the impact on the wider portfolio of a disappointing period for a specific stock is limited. In the long run, diversification can produce more robust returns, as well as a more reliable income.
Quality stocks
Of course, diversification among different stocks will not reduce market risk. With the outlook for the world economy being uncertain at the present time, a market correction would not be a major surprise.
However, by selecting high-quality companies that have strong balance sheets, track records of making dividend payments during uncertain periods, and significant dividend cover, it may be possible to minimise the risk that dividends will be reduced during challenging economic periods.
Sector strength
Furthermore, by investing in sectors that have historically offered defensive characteristics, it may be possible to increase the resilience of your portfolio. Sectors such as tobacco and utilities have historically provided robust income returns. While both industries currently face a period of uncertainty, they may offer inflation-matched dividend growth alongside a relatively high yield over the long run.
Likewise, consumer goods companies and property stocks could provide a degree of stability in terms of their dividend payments. While they may experience volatility in their market valuations, there are a number of FTSE 100 stocks that could provide dividend growth over the long run due to them enjoying a tailwind within their operating environment.
Takeaway
While seeking to generate a passive income from the FTSE 100 presents a risk of capital loss, this can be reduced by diversifying and selecting stocks that operate in sectors that have historically provided relative stability.
Furthermore, with it being possible to generate a relatively high income return from the FTSE 100, the risk/reward opportunity available may be attractive to retirees who are seeking to overcome an inadequate State Pension.
