As an older investor (almost 54 years old) I am always looking for additional passive income. This unearned income is money that I earn effortlessly, even while sleeping. Indeed, as billionaire investment guru Warren Buffett wisely noted: “If you can’t find a way to make money while you sleep, you will work until you die.”
But in today’s world where interest rates are close to zero, it’s much more difficult to earn passive income than it was, say, 15 years ago. So, to increase my income, I don’t invest in low yielding bonds and I don’t keep too much cash on deposit. Instead, I invest in UK stocks which pay high dividends. Dividends are cash distributions paid by companies to shareholders, usually semi-annually or quarterly. However, stock dividends are not guaranteed. They can be reduced or canceled during times of stress, as has often happened in 2020. When we finally retire, my wife and I will use our stock dividends to supplement our monthly pensions.
Passive income from high yield stocks
Currently the United Kingdom FTSE 100 The index offers a dividend yield of 4% per year. But some stocks within the index produce much higher passive income. However, the higher the dividend yield, the more risky it can be (all other things being equal). In my experience, dividend yields above 10% per year usually don’t last. Either stock prices rise or payouts are reduced until dividend yields fall.
Earlier today, I found these 10 FTSE 100 stocks offering a current dividend yield of over 6% per year.
|Imperial marks||the tobacco||8.6%|
|British American Tobacco||the tobacco||7.9%|
|Legal & General||Financial||6.0%|
So should I buy them? First, I would never build a portfolio made up of just these 10 high dividend stocks. To avoid the risk of concentration, I would spread my money over at least 25 different stocks. Otherwise, a bad result could harm the overall value of my portfolio. Second, this 10-stock mini-portfolio is heavily skewed towards just three sectors. Four components are mining companies and two are tobacco stocks, while two more are financial companies. So, there isn’t enough variety among these 10 stocks to build a solid and reliable stream of passive income from dividends.
That said, I wouldn’t be too worried if I put, say, 1% or 2% of my portfolio value in each of these 10 stocks (10% to 20% in total). After all, the average dividend yield on the 10 is almost 8.8% p.a., which certainly appeals to me. Indeed, Â£ 1,000 invested in each stock (Â£ 10,000 in total) would produce passive income of around Â£ 876 per year. Pleasant.
Which of these 10 dividend paying stocks would I buy?
When I worry about the next stock market crash, I’m more drawn to what I call âBBC stocksâ. These are stocks of big, nice, and prudent companies, usually members of the FTSE 100. In previous stock market crashes, I have found that my large-cap value stocks paying generous dividends do much better than the market at large. And even when stock prices fell, my dividends mostly continued to rise during the market meltdowns.
First, for mega-cap dividends plus exposure to a global recovery in 2022-2023, I would buy Rio tinto stock at current 4,883,89p. But I would expect mining stocks to be volatile in 2022-2023, as they were in 2021. Second, for extra passive income, I would also buy British American Tobacco at 2,726p. Cigarette makers have been dividend dynamos for decades – although BAT carries Â£ 40.5 billion in net debt on its balance sheet!
5 actions to try to create wealth after 50 years
Markets around the world are reeling from the coronavirus pandemic …
And with so many large companies still negotiating at prices that appear to be “containers of discounts,” perhaps now is the time for savvy investors to close potential deals.
But whether you’re a new investor or a seasoned professional, deciding which stocks to add to your shopping list can be a daunting prospect during an unprecedented time.
Fortunately, The Motley Fool is here to help: Our UK CIO and his team of analysts have shortlisted five companies they believe STILL offer significant long-term growth prospects despite the global foreclosure …
You see, here at The Motley Fool, we don’t think over-trading is the right path to financial freedom in retirement; instead, we advocate buying and owning (AT LEAST three to five years) at least 15 quality companies, with shareholder-focused management teams at the helm.
That’s why we’re sharing the names of these five companies in a special investment report that you can download today for FREE. If you’re 50 or older, we think these stocks could be a great fit for any well-diversified portfolio, and you may want to consider taking a position in the five straight away.
Cliffdarcy has no position in any of the stocks mentioned. The Motley Fool UK recommended British American Tobacco, Imperial Brands and Vodafone. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.