I’d buy these 2 FTSE 100 shares to retire on a growing passive income

Roland Head explains how he’s using FTSE 100 shares to build a passive income. These companies haven’t cut their dividends for over 20 years.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of BAE Systems. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

How I’m trying to make a million from passive income

Invest as much as possible, regularly, and use the passive income to plough back into more shares. Here's how millionaires…

Read more »

Investing Articles

I’d buy 30,434 shares of this UK dividend stock to target £175 a month in passive income

A top insider has spent over £1m buying this 9%-yielding passive income share over the last year. Roland Head explains…

Read more »