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Naturally, I tend to look at the dividend yield of an individual stock when trying to find a source of income. And the FTSE 100 It gives me exposure to the full dividend potential of stocks within the leading index.
Here’s what I could earn on the FTSE 100 and how I can adjust things further.
pulling out my calculator
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 return has been about 5-3%. During the market crash in 2020, it briefly spiked close to 7%, but as the market recovered, it quickly returned to normal levels.
Dividend yields are constantly changing, but assuming you invested £500 right now, you could earn £18.30 in dividend income over the next year.
If I put this money back into my investment pot, I will be able to increase my income by 2024. If I go forward 10 years, I will have generated £220. Considering this all came from an initial investment of £500, that’s not bad.
However, does it make sense to invest in the entire FTSE 100 via an income tracker? I do not think. For example, there are nine stocks right now that are giving me a return of less than 1%. So why don’t I cut them out and put the money into higher-yielding options?
Switch from passive to active
With my £500, I would prefer to hold a smaller number of FTSE 100 shares. However, this does not mean that I will focus too much on a few shares. Research has shown that a high degree of diversification is possible with around a dozen stocks.
Owning fewer shares doesn’t negatively affect my dividend yield either. In fact, I feel that I can get a higher return than if I were to invest in the entire FTSE 100.
For example, there are 22 stocks with a return of 5% or more. Some have very high yields that I think are unsustainable. But remember, I’m only aiming for 12 out of 22. I think there’s good value in me owning the likes of BT group, glencore, fan and vodafone. All of these are within the 22 potential options.
Of course, dividend income is never guaranteed. I am exposed to companies having a bad year and reducing the amount of the payment. This is a risk I have to take into account when trying to predict how much I could potentially earn.
Suppose I put together a portfolio with an average return of 6%. Over the next decade, he would earn £409 instead of £220 before. This is a significant increase simply for being active in the stocks I select.
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