The glory of generating a passive income is that once you’ve set things in motion, you don’t have to do much yourself. The money rolls in, year after year, and with luck should grow steadily over time. I think a brilliant way of achieving that is to invest in a spread of FTSE 100 shares, inside a Stocks and Shares ISA. Every penny of dividend income and capital growth you generate is sheltered from the taxman. Where else can you manage that?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
How can I earn money the easy way?
A passive income of an extra £555 a week could be life-changing. It works out as £28,860 a year. Imagine getting that on top of your State Pension, and the income generated from other pensions or savings. But how much money would it take to target that?
The answer depends on the average yield generated by the portfolio.
- At a 4% yield, investors would need £721,500.
- At 5%, the required sum drops to £577,200.
- At 6%, it falls further to £481,000.
Those are sizeable sums, but there’s no need to build them overnight. Decades of patient investing across a mix of dividend shares should build wealth steadily.
My target year of 2055 is 29 years away. Let’s say somebody invested £250 a month, and generated an annual average return of 9.64%. That’s the average return on a Stocks and Shares ISA over the last decade, according to Unbiased. At the end of that, they’d have £597,801. This assumes they reinvest all dividends and increased their contribution by 3% a year.
One stock I’ve admired for years is Halma (LSE: HLMA).
The FTSE 100 health and safety technology specialist isn’t the obvious choice for income seekers. Its trailing yield is only 0.62%. By contrast, FTSE 100 insurer Legal & General Group yields a stunning 7.7%. But Halma’s low headline yield is misleading.
Why is the yield so low?
Halma has increased dividends for 45 consecutive years, a remarkable record. Over the last 15 years, payouts have risen at an average annual rate of almost 7%. The reason the yield is low is that its share price has done so well. Over the last 20 years, the combination of the two would have turned £5,000 into £170,000, according to Rathbones. That assumes every dividend was reinvested.
Profits have increased for 22 years running. That consistency explains why the shares command such a premium rating.
Is it too expensive?
Halma just hit a rough patch. Its shares have fallen 13% over the last month. Full-year results (12 June) looked typically strong at first glance, with underlying operating profit up 13% to £486.3m. But investors were concerned that one customer now accounts for a worryingly large slice of revenues, and seems likely to cut its spend. The stock has also grown through acquisitions and investors want to see a stronger pipeline of purchases.
Today, Halma trades on a price-to-earnings ratio of 34. That’s roughly double the FTSE 100 average. I think it’s a bit expensive to consider today given those concerns, but I’ll keep a watching brief to see if I can nab a cheaper entry point.
Should you invest £5,000 in Halma Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Halma Plc made the list?
Harvey Jones owns shares in Legal & General Group.
