I like the idea of generating more passive income. To achieve this, I’ve started to review my spending habits to try and identify any unnecessary or discretionary expenditure.
Each weekday, I usually buy a large skinny latte from my local Starbucks for £3.25. This adds up to nearly £850 a year! If I gave up that coffee, and invested the money saved in UK shares, what level of dividend income could I generate next year?
I’m a cautious investor and will only look at the shares of companies listed in the FTSE 100. According to AJ Bell, these will pay out £81.5bn in dividends in 2022. This is an increase of £3bn on 2021, and will give a dividend yield for the index of 4.1%. But there are large variations between companies.
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Builders
Some of the highest-yielding shares are currently in the construction sector. With the housing market starting to show signs of a slowdown, the share prices of Britain’s biggest builders have fallen recently. Assuming dividends remain at their current levels, Persimmon, Taylor Wimpey and Barratt Developments are presently yielding 18%, 10.2% and 9.8%, respectively.
Some experts are predicting a housing market crash. But the demand for housing remains high, and recent stamp duty cuts may help mitigate the anticipated downturn.
Smokers
Tobacco companies have historically been huge cash generators. This means they’re in a position to make generous returns to shareholders. British American Tobacco‘s shares are currently offering a return of 6.6% and those of its rival Imperial Brands are yielding 6.7%.
These two companies appear to be maintaining their profitability despite the economic slowdown.
Communications
In terms of passive income, two of the FTSE 100’s telecoms giants look attractive at the moment.
BT is currently offering a dividend yield of 6%. Patrick Drahi, the French billionaire, has been building a stake in the company. Drahi now owns 18% and the share price may jump if there’s any sign of him increasing his shareholding further.
Vodafone provides a return of 7.6%. The company has maintained its dividend for the past four years and there’s no reason to expect less this year.
Miners
Two mining companies are also presently showing healthy yields, although their dividends can fluctuate significantly as a result of changes in commodity prices.
Assuming Rio Tinto and Anglo American repeat their final dividends from last year, their shares are currently yielding 12.5% and 7.6%, respectively.
Caution!
When considering any investment strategy, it’s vital I remember that returns are never guaranteed. Past dividends aren’t necessarily a good guide to future shareholder payouts. Share prices are supposed to reflect future earnings. High yields are often a consequence of falling share prices with investors expecting such companies to reduce their dividends.
There’s also been an increasing trend in the FTSE 100 for companies to engage in share buybacks, as an alternative method of rewarding shareholders. This strategy can be preferred by management teams that are usually rewarded based on earnings per share.
Possible returns
Taking an average yield for the nine companies mentioned above of 9.4%, I could generate passive income of nearly £80 from my £850 of coffee savings in 2023. Even if the dividends are reduced, they could still be rewarding. So I’ll consider giving up my favourite drink as one of my New Year’s resolutions.
