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I'm a big fan of passive income: earnings I make outside of paid work. Fortunately, the world is awash with extra income, if you know where to look. And right now, one asset in particular stands out as a bargain to me.
Three popular forms of passive income
There are many ways I can generate additional income outside of work. For example, earning interest on cash deposits, with top-tier UK savings accounts paying over 5% per annum (before tax).
Second, you could invest in bonds: debt securities (promissory notes) issued by governments, companies, and other entities. These pay a fixed interest rate for a defined period. When the bonds mature, they also return my initial investment in full (assuming they haven't defaulted).
Thirdly, I could become a buy-to-let (BTL) landlord, letting properties to tenants. However, this can be hard and expensive work due to maintenance, repairs, and disputes between tenants. So, this really isn't for me.
I love sharing dividends.
For the record, my favorite form of passive income is stock dividends. These are periodic cash distributions that some companies pay to their shareholders/owners.
A big problem is that future dividends are not guaranteed, so they can be cut or canceled at any time. In fact, dozens of companies reduced their payments during the Covid-19 crisis of 2020/21.
Another problem is that not all publicly traded companies pay dividends. Some companies prefer to reinvest their profits in future growth, while others generate losses.
The good news is that, except for a handful of blue-chip companies FTSE 100 Companies pay dividends to shareholders. That's why Footsie is my happy hunting ground for extra income.
The FTSE 100 is a dividend dynamo
Currently, the total market value of the FTSE 100 is around £2bn and Footsie's dividends this year will be around £77.8bn. This implies a current cash yield of almost 3.9% for this year.
However, the investment platform AJ Bell forecasts Footsie's dividend by 2024 will rise to £83.7bn. This generates a forward cash yield of almost 4.2% next year.
Of course, investing in stocks is a risky business. Sometimes, I make losses and get back less than I invested. But as a long-term value/income/dividend investor, my goal is to grab as much cash as I can.
To do this, my wife and I have invested in FTSE 100 (and US and World) tracking funds that passively track certain indices. Additionally, we have purchased 15 different Footsie stocks that offer market-beating cash returns.
Of course, I have to be careful, because the UK economy looks weak. Higher-than-target inflation, higher interest rates and tax rises could put huge pressure on consumer spending in 2024. But with next year's FTSE 100 dividends covered by around 2.2 times forecast earnings , that's a decent margin of safety.
Finally, more than three-quarters (75%+) of Footsie's profits come from overseas. Therefore, I see this index as an ultra-cheap way to invest in global growth, while collecting delicious dividends along the way!
