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A common way to earn passive income is to buy dividend stocks in blue chip stocks. FTSE 100 companies.
If I buy a share in a company like tescoEvery time it pays a dividend I receive a payment for each share I own.
Imagine I bought 100 shares, for example. That would cost me around £311 at the current price (not taking into account fees and commissions, which I would try to manage carefully through my choice of share trading account).
Calculate dividend yield
At the moment, Tesco pays two dividends a year for a total of 12.1 pence per share. If it maintains that payout level, my 100 shares should earn me £12.10 in annual dividends. £12.10 is 3.9% of the purchase cost of £311, so we say that Tesco has a dividend yield of 3.9%.
However, dividends are never guaranteed. Tesco has canceled its payment in the past when the business has fallen on difficult times.
On top of that, although 3.9% is close to the FTSE 100 average yield, some dividend stocks offer notably higher yields. If those returns are sustainable, it could be a good way to increase my passive income streams.
With passive income as a goal, here are a handful of FTSE 100 shares that I would be happy to buy for my portfolio today if I had extra money to invest.
Boring but profitable
Right now, many of the high-yield dividend stocks on the London market are in the financial services sector. In the opinion of some people, this is not an exciting field of business, but it can be lucrative.
For example, I would happily buy Legal and general with its 8.1% yield and its 10.6% yield Phoenix.
Both companies will benefit from long-term high demand for retirement-related financial services products. Both benefit from strong brands (Phoenix owns the rights to the Standard Life brand).
Another company with a strong brand and a large customer base that I would happily buy more shares in (I already have a stake) is M&Gwith its profitability of 9.8%.
What about the risks?
A market slowdown could hurt all three if clients withdraw their funds. Phoenix's mortgage portfolio could be negatively affected by a housing crisis. Legal & General's increasing focus on ESG investing might put off some investors (though it may attract others). Still, I'd be happy to own all three dividend stocks.
Focus on the consumer
I would also add to my participation in British American Tobacco. Despite the decline, cigarette sales remain strong. The dividend share with a 9.6% yield could also benefit from growing demand for non-cigarette products, such as vaporizers.
The fifth dividend stock is another one I already own: Vodafone (LSE: VOD).
Vodafone plans to halve its dividend. But since its yield is 9.9%, that could still mean the payout is substantial even after the cut.
I'm worried about the company's balance sheet. Servicing your debt reduces profits. But asset sales and dividend cuts could help accelerate debt reduction.
Its market is huge and Vodafone has a strong position in many countries in Europe and Africa. I expect the demand for mobile data and services to grow over time. I also like Vodafone's exposure to emerging markets in Africa and see its mobile money offering as an interesting growth opportunity there.
A well-known brand, a large customer base and pricing power all work in its favor.
