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bought FTSE 100 Dividend stocks to generate a passive income to supplement my state pension when I retire. Whenever I have some cash available, I invest it in blue chip UK stocks. I've been doing this for years. My only regret is that I didn't start sooner.
Fortunately, investing in stocks does not require a large sum of money up front. It's possible to get started with as little as £500, or even less for a novice investor who wants to understand how it works.
Buying shares of individual companies is riskier than simply depositing money in a savings account. However, in the long run, it should be more rewarding.
Chasing lifetime dividends
Investors don't just make money when stock prices rise. Many companies pay regular dividends as a reward for holding their shares. Better yet, most try to increase these dividends year after year as profits grow. This offers investors increasing income potential, although there are no guarantees.
FTSE 100 companies that increase or maintain dividends for at least seven consecutive years are known as Dividend Aristocrats. FTSE 100 information and analysis company CHILL OUT (LSE:REL) is one of them. It has increased payout to shareholders in each of the last 13 years.
RELX’s share price has also performed brilliantly. It’s up 39.43% over the past year and 90.57% over five years. That’s pretty impressive, but anyone who reinvested all their dividends directly into RELX stock will have done even better.
The final yield is a modest 1.62%, but that is misleading. Yields are calculated by dividing a company's dividend per share by its share price. So when the stock price goes up (and RELX has gone up a lot), the yield automatically drops.
Increase in payments
In practice, RELX has increased its dividend at an average compound rate of 9.1% per year over a decade, according to figures from AJ Bell. During that time, it has achieved a spectacular total return of 397.1%.
Better yet, it is projected to increase its dividend per share by 7.4% in 2024 and 7.9% in 2025. After its good run, RELX stock appears to be trading expensive at 32.05 times earnings. If earnings decline or fall, the stock could plunge. It's a risk with any stock.
That's why I invest in a range of around 20 income-generating stocks with different profiles. When one underperforms, I hope the others will make up for it.
The long-term average total return of the FTSE 100 is 7% per annum (although I expect to beat this). If I invested £4,000 today, it would give me £30,448 after 30 years. Not bad for an initial stake of £4,000.
If you took 4% of that amount each year, known as the safe withdrawal rate, you would generate a second income of £1,218 a year. That's just over £100 a month. Many of the investments in my portfolio have a return of 7% or more, which would give me an even greater income.
Of course, I wouldn't stop at investing £4,000. If I invest year after year, I expect my passive income to reach tens of thousands a year.
