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.
I’m 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, I’d 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.
This post was originally published on Motley Fool
