Having recently sold some shares, I am now reviewing how much passive income could be generated next year from investing £5,000 of the proceeds. I am a cautious investor, so I am only going to consider shares currently in the FTSE 100.
The idea of passive income — money generated from investing in dividend-yielding shares — is an attractive one. So, what should my strategy be?
Construction
The simplest thing to do, would be to invest all of my £5,000 in the highest-yielding FTSE 100 stock, right?
This is currently Persimmon, which — based on the current share price and, assuming last year’s dividend of 235p is repeated next year — would give an impressive return of nearly 19%.
Persimmon’s dividend is by far the most generous in the FTSE 100, and Britain’s largest builder has a long history of providing attractive returns to shareholders. The dividend yield has been helped by a dramatic fall in its share price – down 53% over the past year.
The fear of higher interest rates and a downturn in the housing market has adversely affected all shares in the construction sector. Barratt Developments and Taylor Wimpey have suffered a similar fate to Persimmon, and both yield around 10%.
However, the government has recently announced reductions in stamp duty and is intending to reform the planning system. There also remains a chronic shortage of housing in the UK. This makes me think that builders’ shares are currently undervalued.
However, all experienced investors understand the importance of diversification, and putting all of my money into one stock, or sector, would be a risky strategy.
Instead, I would choose Persimmon, and look for another two stocks in which to invest.
Mining
Companies in the mining sector have traditionally been good dividend payers.
The two obvious candidates here are Rio Tinto and Glencore, with estimated yields in 2023 of 12% and 10%, respectively. Both of these companies declare their dividends in US dollars, which means the recent fall in sterling improves the return for UK investors.
Rio Tinto principally mines iron, aluminium and copper. Glencore’s focus is on copper, cobalt, zinc and nickel. The fortunes of these two mining giants are largely dependent on global commodity prices.
Of these two, I think I would go for Glencore. Although the yield is lower, more of its metals are used in the manufacture of lithium-ion batteries. The International Energy Agency expects the demand for cobalt and nickel to grow by 20 times within the next two decades.
Glencore is also growing. Its revenue increased by 43% during the first half of this year and it generated over $18bn of cash.
M&G
The next biggest dividend payer in the FTSE 100 is M&G, a savings and investment company that operates under the Prudential brand in the UK, with an expected yield of over 8% for next year.
M&G has assets under management of nearly £350bn.
Expected yield
By dividing my £5,000 equally between Persimmon, Glencore and M&G, I could earn over £600 from dividends next year.
That would be a yield of over 12%.
Of course, dividends are never guaranteed. But, by investing in quality companies, it’s possible to generate significant levels of passive income and, hopefully, achieve capital growth as well.