Quite naturally, I tend to look at an individual stock’s dividend yield when trying to find an income earner. And the FTSE 100 offers me exposure to all the dividend potential from stocks within the lead index.
Here’s how much I could make from the FTSE 100, and how I can tweak things even further.
Getting my calculator out
By taking the dividend yields of all the stocks currently included in the FTSE 100, I get an average. At the moment, this is 3.66%. Over the past five years, the yield has roughly ranged between 5% and 3%. During the market crash in 2020 it did briefly spike close to 7%, but as the market recovered this quickly fell back to normal levels.
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Dividend yields constantly change, but if I assume I invested £500 right now, I could stand to make £18.30 in dividend income over the next year.
If I put this money back into my investment pot, I’ll be able to compound my income for 2024. If I fast forward 10 years, I’ll have generated £220. Considering this all stemmed from an initial £500 investment, that’s not bad.
However, does investing in the entire FTSE 100 via a tracker for income make sense? I don’t think so. For example, there are nine stocks at the moment that offer me a yield of less than 1%. So why don’t I cut these out and put the money into higher-yielding options instead?
Switching from passive to active
With my £500, I’d prefer to own a smaller number of FTSE 100 stocks. Yet this doesn’t mean I’ll be overly concentrated in just a few shares. Research has shown it’s possible to get a high degree of diversification with around a dozen stocks.
Owning fewer stocks also doesn’t negatively impact my dividend yield. In fact, I feel I can get a higher yield than if I invested in the entire FTSE 100.
For example, there are 22 shares with a yield of 5%, or higher. Some have very high yields I think are unsustainable. But remember, I’m only targeting 12 out of the 22. I think there’s good value in me owning the likes of BT Group, Glencore, Aviva and Vodafone. All of these are within the 22 potential options.
Granted, dividend income is never guaranteed. I’m exposed to companies having a bad year and reducing the payment amount. This is a risk I have to factor in when I’m trying to predict how much I could potentially earn.
Let’s assume I put together a portfolio with an average yield of 6%. Over the next decade, I would earn £409 instead of the £220 from before. This is a sizeable increase by simply being active in the stocks I select.
