How do blue-chip dividend shares stack up when it comes to trying to generate passive income?
As with any passive income plan, there are some pros and cons. I like owning FTSE 100 dividend shares as a way to earn some passive income as these tend to be large, proven businesses – and all I need to do to get any dividends is simply own the shares. That is genuinely passive.
However, dividends are never guaranteed to last – and share price falls could hurt my total return, even if I earn a juicy dividend yield. So it is important to take effort when deciding what shares to buy. What is right for me may not be right for another investor.
Aiming for thousands of pounds a year
To illustrate the power of such an approach, say someone wants to target annual passive income of £3,000. (To note, a lower or higher target is possible – I am just using this number as an example to illustrate the process).
The FTSE 100 yield right now is 3.1%. At that level, hitting that target should require an investment of around £96,775.
It is possible to invest in a proxy for the FTSE 100, for example by buying into a fund that tracks the index. Not all of these pay out dividends as cash though, so if passive income is the priority it is important to look at whether the tracker fund pays dividends or reinvests them.
Choosing a range of individual shares
But the 3.1% average is just an average. Some FTSE 100 shares have higher yields.
In today’s market, I reckon someone could realistically target a 6% dividend yield from a portfolio of carefully chosen individual FTSE 100 shares.
At that yield, £3,000 of annual passive income would require a portfolio of £50,000.
Building to a target over time
Still, £50,000 is a lot. Many people reading this may be starting from zero, or close to zero.
Fortunately, this approach can work gradually. For example, someone could open a Stocks and Shares ISA and put money in as and when they can, up to the annual contribution allowance.
If they do not take dividends out as passive income to start with, but instead reinvest them (known as compounding), that could speed up the time it takes the ISA to hit its target size.
Here’s an income share worth considering!
One FTSE 100 high-yield income share I think investors should consider is asset manager M&G (LSE: MNG). The current yield on offer is 6.4%. The company aims to keep growing its dividend per share in coming years, as it has done over the past few years.
In practice, no dividend is ever guaranteed and one risk I see for M&G is that turbulent financial markets combined with squeezed household budgets could lead some of its millions of retail customers to pull more from its funds than they put in, potentially hurting earnings.
Still, that customer base alone is a big asset, in my view, as is the firm’s long-established, well-known brand and multinational expertise in financial markets.
The share price is up 25% in the past year alone and I like M&G’s proven cash generation capabilities.
Should you invest £5,000 in M&g Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
