As a value investor, I like buying shares at discount prices. Also, I prefer stocks that pay decent dividends, which make up almost all of my passive income.
What is passive income?
Passive income is money that doesn’t come from paid work. This unearned income includes savings interest, bond coupons (that is, interest), property income, pensions, and so on.
I love passive income because it works around the clock 24/7, 365 days a year. One day, my goal is to have enough unearned income to retire comfortably.
My favourite form of income
As a long-term investor in shares, most of my passive income comes from share dividends — regular cash distributions paid by companies to shareholders.
However, future dividends aren’t guaranteed and companies can cut or cancel them without warning. During the 2020-21 Covid-19 crisis, dozens of UK firms withdrew or reduced their cash payouts.
Only a small proportion of UK-listed companies actually pay out dividends. Then again, all but a few member companies of the blue-chip FTSE 100 index regularly pay out surplus cash to their owners.
One recent report estimated that total FTSE 100 dividends would jump 11% this year to £84.8bn. This torrent of cash is just waiting to be snapped up by shareholders, both existing and new.
This mini-portfolio pays 8.4% a year
Nowadays, top UK savings accounts pay interest of around 3.5% to 4.5% a year (before tax). That money is almost completely safe, but I don’t know anyone who got rich simply by sticking with cash deposits.
On the other hand, company shares are much riskier. Still, I’m happy to take on this risk in order to earn higher long-term returns. Indeed, long experience has taught me that a balanced portfolio of shares generates rising cash dividends over decades.
For example, this table lists five of the highest-yielding FTSE 100 shares today:
Company
Business
Market value
Share price
One-year change
Five-year change
Dividend yield
M&G
Asset manager
£4.8bn
201.5p
-5.0%
-10.5%
9.7%
Phoenix Group Holdings
Insurance
£5.8bn
582.2p
-2.5%
-17.7%
8.7%
Vodafone Group
Telecoms
£25.5bn
94.2p
-25.2%
-55.3%
8.2%
Legal & General Group
Asset manager
£15.1bn
253.1p
+3.2%
-5.7%
7.7%
British American Tobacco
Tobacco
£67.1bn
3,001p
-9.9%
-25.6%
7.5%
These five shares offer dividend yields ranging from 7.5% to 9.7% a year. The average cash yield across all five Footsie stocks is a market-beating 8.4% a year. By contrast, the wider FTSE 100’s dividend yield is around 3.7% a year.
This isn’t a proper portfolio
For the record, my wife and I already own shares in Legal & General and Vodafone in our family portfolio. My wife avoids tobacco stocks, so British American Tobacco won’t ever be one of our holdings.
However, I’d willingly buy shares in M&G and Phoenix Group Holdings to add to our existing shareholdings. I’d do this purely for their passive income. Like I said, I’m a sucker for high-yielding stocks. Alas, I can’t buy any stocks just yet, because I’m low on cash.
Crucially, it’s important to note that a portfolio consisting of just five shares would be highly concentrated and unbalanced. Personally, I’d aim to have at least 20 to 25 stocks in a well-balanced portfolio.
Lastly, buying high-yielding stocks is by no means guaranteed to produce superior returns. But it’s worked for me since the 1980s!
The post I can get passive income of 8.4% a year from these shares appeared first on The Motley Fool UK.
5 stocks for trying to build wealth after 50
Inflation recently hit 40-year highs… the ‘cost of living crisis’ rumbles on… the prospect of a new Cold War with Russia and China looms large, while the global economy could be teetering on the brink of recession.
Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
Claim your free copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#ffffff”, ‘color’, ‘#FFFFFF’);
})()
More reading
Can the Kodal Minerals share price generate the excitement investors once got from Tesla?
If I’d invested £10k in Unilever shares five years ago, here’s what they’d be worth today
Up 50% in six months, are J Sainsbury shares still a buy?
Will it soon be too late to buy cheap Barclays shares?
I’d buy FTSE 100 shares even in a recession
Cliff D’Arcy has an economic interest in Legal & General Group and Vodafone Group shares. The Motley Fool UK has recommended British American Tobacco P.l.c. and Vodafone Group Public. 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.