Dividend-paying FTSE 100 stocks are the best way I know of generating the passive income I need for my retirement.
Income stocks aren’t just for income. I have a portfolio full of them but reinvest every single dividend straight back into my portfolio for growth and will do so until retirement, when I’ll finally start drawing them as income.
Lately, I’ve been snapping up all the high-income stocks I can find, targeting those with yields of 6%, 7%, 8% or more. Many of them are dirt cheap, trading as low as five or six times earnings. That gives scope for share price growth once markets finally get their mojo back.
Reinvesting for growth
Following a volatile September and October, the FTSE 100 is packed full of bargain dividend stocks. If I had £20,000 to invest, I’d split my money between five of them, inside a Stocks and Shares ISA. I’m not talking theoretically here, I hold all of these stocks myself.
I have big hopes for wealth manager M&G. It offers one of the most generous yields on the FTSE 100 of 9.88%, and while no dividend is guaranteed, this one may just be sustainable.
That yield alone would double my money in less than eight years, even if the share price doesn’t rise in that time. Judging by recent performance, M&G’s shares will pick up very nicely when the rest of the market does.
The same goes for another favourite income stock of mine, Legal & General Group, which now yields 9.02%. It’s an asset manager as well as an insurer and should benefit when stock markets start rising rather than falling. History shows that will happen at some point, we just need some patience. Luckily, I’ve got bags of that and will keep reinvesting L&G’s juicy dividend until we get there.
Taking my time
The housing market is proving surprisingly resilient, with prices actually rising 0.9% in October, according to latest Nationwide figures. This should support UK housebuilders such as Taylor Wimpey. It’s cheap after recent property market uncertainty and currently trades at 5.9 times earnings, while yielding 8.52%.
I would complete my high-income portfolio by shifting into the commodity sector with Rio Tinto, which yields 7.72%. I’d finish off with Lloyds Banking Group, which yields 5.98%.
If I invest £4,000 in each of these five stocks I’ll get an average yield of 8.22% in year one. Now let’s say my retirement was 30 years away and these shares deliver an average annual return of 8% over that time, with all dividends reinvested. They’d be worth £201,253 in total. If they still yielded 8.22%, that will give me income of £16,543 a year.
Even a more modest average yield of 7% would give me £14,088. That’s not bad from initial investment of just £20,000.
Of course, dividends aren’t guaranteed. Any of these could be cut at any time, especially over the lengthy timescale I’ve outlined here. Their share prices could go anywhere, too. I’d therefore carry on investing more money in different FTSE 100 stocks, year after year. Diversifying will reduce risk and build my passive income prospects.
The post £20k of savings? I’d buy these 5 stocks to target passive income of £16,543 a year appeared first on The Motley Fool UK.
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Harvey Jones has positions in Legal & General Group Plc, Lloyds Banking Group Plc, M&g Plc, Rio Tinto Group, and Taylor Wimpey Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and M&g Plc. 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.
