I believe investing in FTSE 100 shares is one of the best ways to make a passive income.
Dividends are never, ever guaranteed. As we’ve seen during economic crashes — and more recently during the pandemic — shareholder payouts can collapse with little or no warning.
But over the long term, companies on the UK’s premier share index have still been reliable and generous providers of dividend income. It’s why I myself have built a diversified portfolio of Footsie stocks using my tax-efficient Stocks and Shares ISA.
Dividend income can help investors like me substantially grow their wealth over time. By using it to buy more shares, I create a continuous cycle of reinvestment, leading to exponential growth in both the number of shares I own and the total dividends I receive.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
What I look for
Buying high-yielding dividend stocks can help me on my journey. But this is not all I look for. When investing for passive income, I also look for companies that stand a good chance of growing shareholder payouts over time.
So I look for UK shares that have several of the following qualities:
- Impressive records of dividend delivery
- Established positions in growing markets
- Diverse revenue streams
- Robust balance sheets, including low debt and strong cash flows
- Economic moats (also known as competitive advantages)
- Defensive operations that ensure long-term earnings stability
With this in mind, here’s a top stock from the FTSE 100 I’d buy at the next opportunity.
A dividend hero
Investing in renewable energy stocks could be an excellent investing tactic as demand for green energy heats up. One option for me could be to buy shares in a company that owns wind or solar power assets.
Another is to purchase shares in businesses that allow renewable energy companies to transmit their power to households and businesses. To this end, I think building a position in National Grid (LSE:NG.) could be highly profitable.
The costs of building its assets to capitalise on the clean energy revolution are immense. Indeed, National Grid plans to spend £58bn to decarbonise the country’s electricity network in the years ahead.
Some worry about the impact of these costs on earnings in the short-to-medium term. But the plans — which will include connecting up 21GW of extra offshore wind — also have the potential to drive both profits and dividends through the roof once completed.
5%+ dividend yields
There are other reasons why I like National Grid as a dividend stock. It has a monopoly on keeping the country’s power network up and running, and its services remain in constant demand regardless of economic conditions.
These, in turn, provide the sort of earnings stability most other UK shares can only dream of.
Thanks to this, National Grid has an excellent record of consistent dividend growth. And pleasingly, City analysts expect this trend to continue, which results in large dividend yields of 5.3% and 5.5% for this year and next.
When it comes to dividend investing, I think this FTSE 100 share is hard to beat.
