The stock market crash has left the FTSE 100 with a dividend yield of 5.5%, according to official data. I reckon that’s an attractive figure for investors wanting to build a passive income.
However, a number of FTSE 100 firms have suspended their dividends in recent weeks. I suspect the real dividend yield from the FTSE this year will be lower. That’s bad news for 2020. But I think it’s a great opportunity to buy bargain shares that’ll provide a passive income in the future.
That’s certainly what I’m doing. I’ve been adding FTSE 100 shares to my income portfolio, even if they’ve suspended their dividends.
Why I’m not worried about dividend cuts
If you rely on your stock portfolio for income, I’d always recommend keeping a buffer of at least six months’ income in cash. Without this, this year’s dividend cuts will have been pretty scary.
But if you’re still building your passive income, then I see this as no more than a bump in the road. Some of the companies in the FTSE 100 have been trading for hundreds of years. They’ve survived wars, recessions, and other difficult periods.
I expect most FTSE 100 firms to restart dividend payments in 2021, if not sooner.
How I’d invest in the FTSE 100
One option for investors putting cash into the market today is to buy a low-cost FTSE 100 tracker fund.
As I write, the FTSE 100 is trading at about 5,700. On a long-term view of at least five years, I think this offers good value. However, one weakness of the FTSE 100 index is that it’s heavily weighted towards oil, mining and big banks. At the end of March, these companies accounted for more than 30% of the entire market.
I prefer my portfolio to be more evenly diversified across different sectors of the market. The simplest way to do this is to buy FTSE 100 shares from different sectors, making each holding the same size.
I’d aim for a portfolio of 15-20 shares. In my view, this is enough to get good diversification and exposure to all the main areas of the global economy.
The FTSE 100 shares I’d buy
When you’re building a stock portfolio, it can be difficult to know where to start. For passive income, I’d focus on a mix of high yield stocks and companies with a good track record of dividend growth.
What we’re aiming for here is a passive income portfolio that pays a yield of about 5% that’ll keep pace with inflation.
At the high yield end, I’d focus on traditional income favourites, such as Royal Dutch Shell (11% yield), GlaxoSmithKline (4.8%), British American Tobacco (7.5%) and Legal & General (9.5%). Next would be my pick of the retailers, while I think catering group Compass also has attractions.
To provide stronger dividend growth, I’d consider companies such as software group Sage (2.7%), consumer goods giant Unilever (3.6%) and motor insurance firm Admiral (6%). Tech stars Rightmove and Auto Trader might also be worth considering for their historically strong dividend growth, despite very low yields.
I’m confident that by following this strategy you should be able to build a portfolio that’ll provide a reliable passive income for many years. It’s what I’m doing with my own cash.
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Roland Head owns shares of British American Tobacco, GlaxoSmithKline, and Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended Admiral Group, Auto Trader, Compass Group, Rightmove, and Sage Group. 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.