The FTSE 100 index includes many dividend-paying shares. And I reckon dividend income is an excellent way to earn passive income for life.
When a listed company pays dividends, it distributes a share of its profits to shareholders like myself. So I’d want to pick companies that have good prospects for future earnings.
So how do I go about doing so? First, I’d need to decide how much I want to invest and for how long. As a long-term investor, my timeframe is over five years. In the near term, share prices can rise and fall due to market sentiment. But several years should allow a good company to demonstrate its value.
Buying the FTSE 100
If I was investing £5,000 today, I could buy a FTSE 100 index fund. On average, the UK’s leading shares pay a dividend yield of around 4%. Normally, that wouldn’t sound too bad.
But right now, UK inflation is at the highest level since 1982. Prices are rising rapidly as I can frustratingly see at the fuel pump, supermarket and on my energy bills.
A 4% dividend yield won’t keep up with rising prices, so I’d prefer to aim higher. I’ve found several FTSE 100 shares I’d buy that yield over 8%.
8%+ dividend yield
For instance, I’m drawn to mining giant Rio Tinto. Currently, it offers a whopping 13% dividend yield.
A word of warning, however. This sounds particularly high to me, and there is a risk that lower future earnings could result in its dividend being cut. Even so, Rio has a rich history of reliably distributing dividends.
As the second-largest metals and mining operation in the world, its earnings prospects are sound and I reckon it’s likely to continue thriving for many decades.
Next, I want to pull the trigger on Phoenix Group Holdings. It may not be a household name, but it’s a FTSE 100 business worth over £6bn. It focuses on long-term savings and retirement businesses.
Phoenix is also a reliable dividend payer that currently offers an appealing 8% yield. I also like that it has regularly paid dividends for 13 years and has a track record for growing its dividend consistently.
Bear in mind that falling share prices in general is a risk to earnings but, with 240 years of experience, I’m confident that it is resilient enough to manage.
Chunky passive income
If I invest in these two individual shares, on an initial investment of £5,000 then I would expect to receive a passive income of £525 every year. That sounds great to me.
But over time, I would try to add funds to my pot to eventually reach £100,000. That should be enough to pay an annual passive income of £10,500. It’s not quite enough to retire, but adding it to other pensions should allow for a more comfortable retirement.
The post How I’d invest £5,000 in FTSE 100 shares to earn passive income for life appeared first on The Motley Fool UK.
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Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.