FTSE shares can be a powerful passive income-generating tool for prudent investors. The UK’s home to some of the most generous dividend-paying enterprises on the planet. And while not all of them are sound investments, the vast pool of opportunities provides investors with ample choice.
In fact, given sufficient time, putting aside £500 each month for top-notch FTSE stocks could be the key to unlocking a £48k income stream in the long run. And those who start early may even get to enjoy an earlier retirement.
Earning income from a portfolio
Having cash appear in a bank account from an investment portfolio is relatively straightforward. Investors just need to buy and hold dividend stocks and, usually every quarter, money will magically materialise. However, for those seeking to earn the equivalent of a five-figure salary, taking dividends may not be the smart move.
Instead, these payments should be automatically reinvested. This results in owning more shares in each business so that the next time dividends are paid out, investors end up receiving more, even if dividends don’t get hiked, in a snowballing compounding process.
If we use the FTSE 100 as a benchmark, investors who historically reinvested their dividends have earned close to 8% a year instead of just 4% on average. By investing £500 a month at these rates for 35 years, that’s the equivalent of having a portfolio worth £457k at 4%, or £1.2m at 8%!
In terms of income, that’s the equivalent of having either £18,280 without reinvesting during the first 35 years or £48,000 with reinvestments each year. Of course, this is assuming that another market crash or correction doesn’t come along to throw a spanner into the works.
Finding suitable stocks
Clearly, dividend reinvestment delivers the best results, providing investors are able to wait before taking their dividend profits. However, it’s important to remember that not all dividends are worth the same. Reinvesting capital into a struggling business that’s likely to cut shareholder payouts isn’t prudent capital allocation.
Instead, investors must pay close attention to the opportunities they’re presented with. As I previously mentioned, not all FTSE shares are good investments. Therefore, even if a high yield is being offered, discipline’s required to avoid falling into traps.
That’s why a company like Admiral (LSE:ADM) looks potentially interesting. The insurance business continues to be a dominant force in its industry. And based on its latest results, it’s easy to see why.
Despite the adverse market conditions, Admiral managed to get more customers through its doors despite higher insurance premiums. As such, total turnover in 2023 increased by 31%, with pre-tax profits up 23%. Subsequently, the return on equity reached 36% compared to 29% the year prior, with solvency ratios improving across the board.
Needless to say, those are some desirable traits for a source of dividends. But obviously, they come with some risk factors. With around half of its customer base concentrated in motor insurance, the impact of inflation is significant. Don’t forget motor insurance policies have a high chance of receiving claims compared to other insurance products. And they’re notoriously expensive, especially now that car parts have risen drastically in cost.
Nevertheless, Admiral’s management has demonstrated the prudence of its strategy, making this a risk potentially worth taking.
This post was originally published on Motley Fool
