If you want to generate a passive income, then I think you should seriously consider buying the FTSE 100.
With a dividend yield of 4.5% at the time of writing, the FTSE 100 offers a level of income that’s vastly above what’s on offer from most cash savings accounts, and it’s just as easy to invest in the index as it is to open a savings account.
The fact that you can invest in the FTSE 100 at the click of a button is one of the three main reasons why I would invest in the FTSE 100 for a passive income.
Any investor can go to an online stockbroker and buy a low-cost FTSE 100 tracker fund in just a few minutes. Tracker funds are designed to replicate their underlying index and are managed by professional investment houses.
So, after you’ve clicked ‘buy’ there’s no need for you to do any further work. All you need to do is sit back, relax, and watch the income flow into your account.
Another bonus of using the FTSE 100 to produce a passive income is that most tracker funds charge less than 0.3% to replicate its performance, allowing you to keep more of your hard-earned money. Actively managed investment funds can cost as much as 2% every year to manage money on your behalf.
The next reason why I would buy the FTSE 100 for a passive income right now is its dividend reliability.
The dividend yield of 4.5% is an aggregation of all the dividends paid by the 100 companies that make up the index. Every single company in the index would have to eliminate their dividends for the yield to drop to zero.
I think it is improbable this will never happen. Therefore, I reckon investors can rely on the index’s yield.
The third and final reason why I think the FTSE 100 is an excellent instrument to use to generate a passive income is its diversification.
More than 70% of the FTSE 100’s profits come from outside the UK. This implies that no matter what happens to the UK economy over the next few years, as long as the global economy continues to grow, the index’s constituents should continue to grow and produce a return for investors.
How much is enough?
Those are the three reasons why I would buy the FTSE 100 for a passive income. But how much would you need to invest to generate a passive income from the UK’s leading blue-chip stock index?
The answer to this question really depends on how much income you require. For this article, I’m going to use the average rental figure for a two-bedroom house across the UK, which is £820 a month or £9,840 a year.
With a dividend yield of 4.5% at the time of writing, to generate this level of passive income from the FTSE 100, I estimate a saver would need to a accumulate a lump sum of £220,000. That might not be enough to cover living costs entirely, but it would cover housing costs potentially indefinitely.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.