Passive income is money I don’t have to work for. It arrives month after month, year after year, without me having to lift a finger. Ideally, it will rise steadily over time too.
It sounds a wonderful, impossible thing, but in fact I can get it by investing in FTSE 100 shares that pay regular dividends to investors. Companies listed on the UK blue-chip index currently yield 3.6% a year on average. Some pay as much as 7%, 8% or 9%.
Better still, because companies aim to increase their dividends as profits rise, my second income stream should grow over time.
Iâm buying dividend stocks to secure my retirement
By reinvesting every dividend I receive, I buy more shares, which pay me more dividends, which pay more income in an endless virtuous cycle.
Also, if the share prices of those companies rise, so will the value of my capital, making me even better off.
None of this is guaranteed and I could lose as well as gain. But I’ve built a portfolio of around 20 stocks, so if some underperform, others will hopefully more than compensate.
One of today’s most spectacular FTSE dividend income stocks is insurance conglomerate Phoenix Group Holdings (LSE: PHNX), which I currently hold. It has a scarcely believable trailing yield of 10.5%. That’s more than double the best instant access savings account, with potential share price growth on top.
It’s not strictly fair to compare a stock with a savings account. With shares, my capital is at risk. Also, as mentioned, dividend income isn’t guaranteed. Phoenix has a solid track record though, hiking shareholder payouts in eight of the last 10 years, as this chart shows.
Chart by TradingView
Phoenix generates enough cash to fund that stonking yield but seems to be doing well today. In the first half, total cash generation jumped 5.8% to £950m. Across 2024, the board expects to hit the top end of its £1.4bn-£1.5bn target range.
At some point I think the share price will fly
The Phoenix share price has gone almost-sideways over the last year, rising just 1.54%. It’s down 30.54% over five years.
This has been a bumpy period for FTSE 100 financial stocks, but I’m hoping they kick on when interest rates fall further and the economy picks up. While I wait, my reinvested dividends will buy more Phoenix stock at the lower price.
I’m balancing my stake in Phoenix with stocks that pay less income but offer higher capital growth prospects.
By doing this, Iâd hope to yield around 6% a year and enjoy average capital growth of another 5%. That’s ambitious but if I manage that it would give me a total average annual return of 11%.
Investing is a long-term game but the rewards are huge given time. If I had £2,000 at my disposal today, and left it invested for 35 years, an average annual return of 11% could turn it into an impressive £77,150.
That 6% yield would generate passive income of £4,629 a year, more than double the amount I put in. And I’ll get it every year for life with luck, without touching my capital.
My figures are crude but show how investing in shares can generate long-term passive income. And I certainly wouldn’t stop at investing £2,000.
The post £2k in savings? Hereâs how Iâd invest that to target a passive income of £4,629 a year appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
Here’s the growth forecast for Phoenix Group shares through to 2026!
These FTSE 100 stocks have 10% yields! Should I buy now?
Investing £100k in this share could add £1.2m to my SIPP valuation!
Iâd consider this beaten-down FTSE 100 dividend stock to target a second income of £19,000
Could putting £20,000 into FTSE 100 stocks get me monthly passive income of £2,756?
Harvey Jones has positions in Phoenix Group Plc. 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.
