Rather than trying to earn passive income by setting up their own business, many people simply invest in proven, profitable FTSE 100 businesses.
The index of 100 leading UK companies contains a lot of mature, large businesses. While their growth opportunities can sometimes be limited, most of them have a proven ability to generate excess cash.
Most use at least some of that to fund dividends to shareholders.
So, how lucrative an opportunity might this be for people seeking to build passive income streams?
Average – or above average?
At the moment, the FTSE 100 yields 3.1%.
So, say somebody wants to target a monthly average of £500 in passive income. What would that require?
£500 per month adds up to £6,000 in a year. At a 3.1% dividend yield, that income goal would require an investment of close to £194k.
One straightforward approach could be to invest in a FTSE 100 tracker. Not all trackers pay dividends, though, so it is important to compare them carefully when choosing one.
That 3.1% average is just an average. Instead of a tracker, someone might decide to build their own portfolio of select FTSE 100 shares targetting a higher yield than the index’s average.
For example, if they can achieve a 6% average yield, a portfolio worth £100k ought to be enough to help them hit their target. That is still a lot of money – but meaningfully less than £194k.
Here’s an income share to consider
I see 6% as a realistic target in the current market.
Remember, that is just an average. So some shares in the portfolio could offer a lower yield and still earn a place, as long as the portfolio overall manages to hit the target.
As with any portfolio, it is important to stay diversified. FTSE 100 shares are typically large, proven businesses – but even a previously highly successful company can sometimes disappoint investors.
One FTSE 100 share I think merits consideration currently yields 6.1%. The company’s management aims to keep growing its dividend per share annually, as it has done in recent years.
Dividends are never guaranteed at any company, but I do feel upbeat about the long-term prospects here.
The company in question is asset manager M&G (LSE: MNG).
Proven cash generation potential
I like M&G partly because it has demonstrated that its business model can generate sizeable excess cashflows.
The asset management industry is huge. Thanks to resilient demand from customers, it is likely to stay that way.
That attracts competition – and I see that as a risk for M&G. In recent years it has battled to get its million of policyholders to pay more in than they take out. Lately it has been winning that battle, but if the tables turn again, that is a risk to earnings.
But with that customer base, strong brand, and deep financial management experience, I like the business’s prospects.
Should you invest £5,000 in Rolls Royce right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
