The benchmark index of large listed UK companies is known as the FTSE 100. Those hundred shares are a cross-section of British industry, operating both here and internationally. Many pay dividends, and investing in FTSE 100 shares could be one way for me to build passive income streams.
So, if I wanted to target £300 a month in dividend income from owning such shares, how much would I need to invest?
Understanding dividend yield
The answer to that question lies in the investing concept of dividend yield.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Yield is how much I would expect to earn each year from dividends as a percentage of the amount I invest. For example, at the moment, FTSE 100 shares BP and Shell have yields of 3.9% and 3.4%, respectively. So if I split £1,000 between them, my average yield would be 3.7%. That means that my £1,000 should hopefully earn me around £37 a year in income.
Dividends can go up or down
Dividends are never guaranteed, though. Both BP and Shell cut theirs a couple of years ago, in fact.
That is why, even when investing in blue-chip FTSE 100 shares, I would also diversify across different businesses. If the £1,000 was all the money I was willing to invest, I would not just put it in two shares both operating in the energy industry.
Focussing on a target
Based on the concept of dividend yield, I can figure out roughly how much I would need to invest to try and hit a monthly dividend target of £300.
That income adds up to £3,600 per year. At the moment, the average yield of FTSE 100 members is exactly the same as my example above – 3.7%. So I would need to invest around £97,000 to try and hit my monthly income target.
Investing with less
While a monthly £300 passive income appeals to me, I do not have a spare £97,000 to invest in FTSE 100 shares right now!
However, the maths stays the same if I invest less. Imagine I invested half of £97,000. Then I ought to get half of my dividend target. That is still a handy £150 per month.
So, with whatever money I had to invest, I could hopefully generate dividend income from FTSE 100 shares. However, how much I might earn would depend on the amount I invested.
Buying individual FTSE 100 shares
The example above presumes I am doing what is known as buying the index. In other words, I would be purchasing a stake in each of the FTSE 100 companies. Many investors do that by buying shares in index trackers.
But I could also buy individual FTSE 100 shares. Currently in my portfolio, I own some blue chips that yield significantly more than the index’s average of 3.7%, including British American Tobacco, Imperial Brands, and M&G.
Does it make more sense for me to try and hit my dividend income target through an index tracker or investing in individual shares? I prefer to buy individual shares as I am willing to spend time learning about businesses and looking for quality FTSE 100 shares I think are attractively valued. That way, I aim to hit the same income target even when investing less money than if I simply bought the index.
