I’m a huge fan of passive income — the earnings I make outside of paid work. Happily, the world is awash with extra income, if I know where to look. And at the moment, one particular asset stands out as a bargain buy to me.
Three popular forms of passive income
There are many ways I can generate extra earnings outside of work. For example, earning interest from cash deposits, with table-topping UK savings accounts paying over 5% a year (before tax).
Second, I could invest in bonds — debt securities (IOUs) issued by governments, companies, and other entities. These pay a fixed rate of interest over a defined period. When bonds mature, they also return my initial investment in full (assuming they haven’t defaulted).
Third, I could become a buy-to-let (BTL) landlord, letting out property to tenants. However, this can be hard work and expensive, due to maintenance, repairs, and tenant disputes. Hence, this really isn’t for me.
I love share dividends
For the record, my favourite form of passive income is share dividends. These are regular cash distributions paid by some companies to their shareholders/owners.
One big problem is that future dividends are not guaranteed, so they can be cut or cancelled at any time. Indeed, scores of companies cut their payouts during the Covid-19 crisis of 2020/21.
Another issue is that not all companies listed on the stock market pay dividends. Some firms prefer to reinvest profits into future growth, while others are loss-making.
The good news is that all but a handful of blue-chip FTSE 100 companies pay dividends to shareholders. That’s why the Footsie is my happy hunting ground for extra income.
The FTSE 100 is a dividend dynamo
Currently, the FTSE 100’s total market value is around £2trn and Footsie dividends for this year will be around £77.8bn. That’s a running cash yield of almost 3.9% for this year.
However, investment platform AJ Bell forecasts that Footsie dividends for 2024 will leap to £83.7bn. This generates a forward cash yield of nearly 4.2% next year.
Of course, investing in shares is a risky business. Sometimes, I make losses and get back less than I put in. But as a long-term value/income/dividend investor, my aim is to grab as much of this cash pile as I can.
To do this, my wife and I have invested in FTSE 100 (and US and global) tracker funds that passively follow certain indexes. Also, we have bought 15 different Footsie shares that offer market-beating cash yields.
Of course, I should be wary, because the UK economy is looking weak. Above-target inflation, higher interest rates and rising taxes could put a big squeeze on consumer spending in 2024. But with next year’s FTSE 100 dividends covered around 2.2 times by forecast earnings, that’s a decent margin of safety.
Lastly, more than three-quarters (75%+) of Footsie earnings come from overseas. Hence, I see this index as an ultra-cheap way to invest in global growth, while collecting delicious dividends along the way!
The post I’ve grabbed my share of this £83.7bn of passive income! appeared first on The Motley Fool UK.
Our analysis has uncovered an incredible value play!
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p 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 8.5%, 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
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Cliff D’Arcy has no position in any of the shares mentioned. The Motley Fool UK has recommended AJ Bell. 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.
