As an older investor (I turned 55 last month), I’m pondering my retirement plan. As things stand, I’d like to keep writing for the remainder of my life. But in the meantime, I want to boost my passive income to widen my options.
Why I love passive income
Passive income is unearned money — it comes from sources other than paid work. For example, these include savings interest, interest paid by fixed-interest bonds, rental income from property, and work and state pensions.
However, my favourite form of passive income isn’t listed above. My #1 winner is share dividends — regular cash payouts made by companies to shareholders.
The problem with dividends
Alas, future dividends are not guaranteed. This means that they can be cut or cancelled at any time. For example, during 2020’s pandemic panic, dozens of big companies lowered or suspended their cash payouts.
In addition, not all UK-listed companies pay dividends. In fact, most don’t. But almost all members of the elite FTSE 100 index regularly distribute spare cash to their owners.
That said, 37 years of investing experience has taught me that, over decades, a well-built portfolio of carefully chosen shares will generate a rising tide of cash. Also, as share prices tend to increase over the long term, this provides me with extra capital gains (profits from selling shares at higher prices).
Dividends are set to soar
Now for the good news. According to the latest edition of investment platform AJ Bell‘s highly useful Dividend Dashboard report, FTSE 100 dividends are set to surge.
Indeed, AJ Bell expects total Footsie dividends to leap by 11% in 2023. Next year, they are forecast to rise by another 7%. That’s fantastic news for investors in UK blue-chip shares (including me).
For 2022, AJ Bell expects the FTSE 100 to produce a cash yield of 4.2%, once all ordinary dividends have been declared and paid. By the way, this figure excludes one-off special dividends — yet another boost to returns.
The group expects 2022’s total dividends to come in at £76.4bn, rising to £84.8bn in 2023. The latter figure works out at around £1,570 for each of the UK’s 54m adults. Nice.
How I’m building my cash fountain
To grab my share of this tsunami of cash, I have three options. First, I can pay a fund manager to pick shares for me. I haven’t done this for decades, as I’ve been put off by high charges and poor performance.
Second, I can buy the entire FTSE 100 by investing in a cheap, simple index-tracking fund. My wife and I have large sums in UK, US, and global index trackers.
Third, I can pick my own stocks, aiming to produce superior returns and higher passive income over time. My wife and I have built mini-portfolios in this way.
Crucially, AJ Bell reckons that £46.6bn — 55% — of all FTSE 100 dividends for 2023 will be paid by just 10 companies. These ‘dividend dukes’ include some of the UK’s leading banks, oil & gas producers, mining companies, and healthcare groups.
Hence, my wife and I hold direct stakes in three of these dividend dynamos — as well as seven other FTSE 100 shares and three FTSE 250 stocks. And we hope to collect passive income from these firms for decades to come!
