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In keeping with AJ Bell, the 2024 forecast dividend yield for the FTSE 100 is 3.7%. If I used to be capable of obtain an similar return, I’d generate £740 a yr in revenue from a £20,000 funding.
However there are many Footsie shares providing greater yields.
For instance, Phoenix Group (LSE:PHNX) is at the moment yielding 10.75%. If this was sustained, a £20,000 lump sum would give me a second revenue of £2,150 a yr, or £179 a month.
Phoenix Group is the UK’s largest long-term financial savings and retirement enterprise with over 12m prospects. It has a powerful portfolio of manufacturers — together with Normal Life and Solar Life — and has been in existence for 240 years. And with an rising state retirement age, I feel it’s nicely positioned to develop over the approaching many years.
It additionally has a superb observe file in rising its dividend, which, in money phrases, is now 43% greater than it was in 2014.
Nevertheless, at 30 June 2024, it had £95.9bn of equities and £3.9bn of funding properties on its stability sheet. This makes it weak to an financial downturn.
And for the six months ended 30 June 2024, it reported a loss after tax of £646m. If this efficiency persists, its beneficiant payout could possibly be in jeopardy.
I’d must do extra analysis earlier than deciding whether or not to put money into Phoenix Group. However at first look, its wholesome dividend makes it engaging to an revenue investor like me.
However wait
Nevertheless, it wouldn’t be a good suggestion investing in only one inventory.
Happily, there are different high-yielding alternatives within the FTSE 100.
There are presently 13 shares providing a yield in extra of 6%. The common of those is 7.9%. Making use of this degree of return to a £20,000 stake would generate £1,580 — or £132 a month — in dividend revenue.
However as an alternative of banking this quantity yearly, I may use it to purchase extra shares.
In yr two, the £1,580 may earn me one other £124.82. This may then give me £1,704.82 to put money into yr three. And so forth. This is named compounding. It’s been described because the eighth surprise of the world.
And by taking a 40-year funding horizon, I can see why it’s so common. That’s as a result of repeating this train for 4 many years would flip an preliminary £20,000 into £418,685.
A 7.9% yield on this quantity would generate passive revenue of £33,076 — £2,756 a month.
However that is solely half the story.
Historical past means that FTSE 100 shares will even respect in worth. Since inception, the Footsie’s grown by a median of 5.2% a yr.
A actuality test?
However this evaluation carries various well being warnings.
Firstly, historical past doesn’t essentially repeat itself. This implies dividends (and capital progress) are by no means assured. I’m positive the FTSE 100 will look very totally different in 40 years’ time to what it does at present.
And an preliminary sum of £20,000 is some huge cash to search out. Though investing little and infrequently will obtain related outcomes, it will take far longer to generate a four-figure second revenue.
However regardless of these caveats, this theoretical train does spotlight how — by taking a long-term view — it is perhaps attainable to generate a wholesome degree of passive revenue from FTSE 100 shares.
