It’s almost the end of the tax year, and from 6 April I’ll be able to add new funds to my Stocks and Shares ISA. This year, I’m looking to earn greater passive income from FTSE 100 shares in the form of dividends.
I reckon the FTSE 100 is a great place to find relatively stable dividend payers. Many of these leading shares have a long history of paying regular income to shareholders. And the very best ones also manage to grow their payments over time.
Buying the index
So if I’ve got £10,000 to invest in FTSE 100 shares, how best could I potentially earn a passive income for life? One option is for me to use the whole amount to buy an index tracker. The average FTSE 100 dividend yield is currently 3.5%, so I could expect an annual passive income of £350.
In addition, the value of the shares could rise over time. For instance, over the past 10 years, the FTSE 100 index has grown by 30%. That’s not to say that the next decade will result in the same. Recent history can be a poor guide to future returns. That said, I’m optimistic about business growth over the coming years. Companies tend to find a way to innovate and thrive. And those that aren’t able to will decline and eventually could drop out of the index.
Top FTSE 100 picks
Apart from investing in the index, I could buy individual shares instead. With some research, I could pick and choose a selection of companies I’d like to invest in. Many FTSE 100 shares carry a dividend yield greater than the average.
For instance, both Persimmon and Rio Tinto currently yield a market-busting 10%. These companies are high-quality businesses that I’d happily invest in for my long-term portfolio.
That said, I’d be cautious in just looking for large dividend yields. High dividend-yielding shares might not be able to sustain such payments. But in this example, both shares have a long history of earnings growth and I’m comfortable regarding their prospects over the coming years.
Defensive options
I’d also diversify my options across several sectors. Both Persimmon and Rio are relatively cyclical. So they tend to perform best in a strong economy. But I think it’s important to own some defensive shares too.
As such, I’d consider Imperial Brands and SSE for my defensive picks. Imperial yields 9% and has a 25-year history of paying consistent dividends. Historically, its earnings growth has been lacklustre. But I’d still like to own it for its reliable and relatively stable income.
SSE yields 5% and has consistently been paying dividends for almost three decades. It operates in an area that I’d like to have exposure to – renewable energy. As the leading generator of renewable electricity in the UK, SSE could be in prime position to capitalise on this global megatrend.
Reinvesting dividends
I would consider splitting my £10,000 investment equally between these four shares. By doing so, I could achieve an average dividend yield of 8.5%. That should give me an £850 annual passive income.
Finally, if I reinvest these dividends and buy more shares every year, I could benefit from the wonders of compounding. That should result in a much larger pot over time.