We all want a passive income for when we retire. Money that we get paid automatically each month, long after we stop work.
Pensions are a traditional source of passive income for retirees, but the State Pension age keeps rising, and company pensions don’t always add up to much. Increasingly, I think it makes sense to plan for your own retirement. A core part of my approach to retirement income is building a portfolio of FTSE 100 shares which offer reliable payouts. I think this is one of the safest and simplest ways to generate passive income.
You might question how safe the stock market is, given this year’s crash. It’s true that some companies cut or suspended their dividends. However, the companies I’m going to look at today have continued to make dividend payments as usual this year. In fact, neither of them has cut their dividend for at least 20 years, providing over two decades of passive income to shareholders.
Products we can’t live without
My first pick is consumer goods group Unilever (LSE: ULVR). We all know this company through its brands — names like Dove, Ben & Jerry’s, Persil, and many more. Unilever sells these everyday products to consumers all over the world.
Most of these products are affordable, repeat purchases. But customer loyalty to popular brands means Unilever can charge a little more than own-branded rivals. As a result, profit margins are high, and the group generates plenty of surplus cash each year.
Much of this spare cash is used to fund the group’s dividend. Unilever’s payout has not been cut for more than 50 years. That’s an impressive record, in my view.
What kind of passive income would I get if I bought Unilever shares today?
The company’s stock offers a forecast dividend yield of 3.3%. Analysts expect dividend growth to continue in 2021, giving a forecast yield for next year of 3.6%.
This yield isn’t the highest that’s available from FTSE 100 shares. But because I’m planning for the future, I’m happy to accept a lower yield today in exchange for future growth.
Shares in Unilever very rarely look cheap. But I’d be happy to buy the shares at their current level of around £43. I think that’s a fair price for an excellent business.
Government-backed passive income?
My next pick may be a little more controversial. Defence stocks aren’t everyone’s cup of tea. But BAE Systems (LSE: BA) is one of a handful of FTSE 100 shares where the dividend hasn’t been cut for more than 20 years.
The company’s business is well known, although perhaps a bit more diverse than many people realise. In addition to aircraft such as the Typhoon fighter jet, BAE also builds ships, military vehicles, and a wide range of other equipment. There’s also has a growing cybersecurity division.
BAE relies on a fairly small number of large, government contracts to drive its profits forward. These contracts don’t always arrive exactly on schedule, so BAE’s profits don’t always rise every year.
Despite this, my experience is that this business generates plenty of cash. Management protect the payout so it’s affordable, even in lean years.
BAE shares offer a forecast yield of 4.4% at the moment. I think that’s a good starting point for a long-term passive income. I’d certainly be happy to buy (more) BAE shares for my portfolio today.