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Because the UK’s premier inventory market index celebrates its fortieth anniversary, it’s value reflecting on one of many benchmark’s key strengths, particularly passive earnings technology.
Whereas the FTSE 100 woefully underperformed the S&P 500 over the previous decade, by way of capital progress, it’s traditionally provided a a lot greater dividend yield. For traders who prioritise incomes common money payouts from the inventory market, the Footsie could be the higher selection.
So how a lot passive earnings might I earn from a £10k funding? What concerns ought to traders keep in mind? And are there higher alternatives in particular person shares?
Let’s discover…
Monitoring the index
A great way to put money into the FTSE 100 is to purchase items in an exchange-traded fund (ETF) that tracks the index’s efficiency. The Vanguard FTSE 100 UCITS ETF (LSE:VUKE) is one instance.
At present, this ETF gives a 3.82% yield and every particular person unit trades for £33.13. Because it mirrors the Footsie, the fund’s holdings are concentrated in large-cap UK shares that includes within the index.
With a bit of over £10k to speculate, traders might buy 302 items as we speak. On the present yield, that may produce greater than £382 in annual passive earnings.
Threat and reward
Though dividend funds aren’t assured, traders would profit from diversification through broad publicity to the FTSE 100. This reduces potential dangers from particular person firms reducing their payouts.
Plus, it’s value noting how engaging the FTSE 100 is true now from a passive earnings perspective. For context, one other Vanguard fund, the FTSE All-World Excessive Dividend Yield UCITS ETF (VHYL), gives world publicity to shares “that pay dividends which can be usually greater than common“. But its 3.31% yield doesn’t beat the Footsie!
That mentioned, traders looking for progress are more likely to be disillusioned. Vanguard’s FTSE 100 ETF has solely grown 6% over the previous 5 years, excluding dividends.
There’s a cautionary story in the truth that one of the best performing FTSE 100 inventory final yr was Rolls-Royce, which delivered a outstanding 221% share worth achieve. The British aerospace large doesn’t at the moment situation dividends.
A inventory to contemplate
Whereas broad diversification’s necessary, there are additionally doubtlessly vital advantages in sifting via the index to establish particular person high-yield dividend shares.
One firm I put money into is housebuilder Taylor Wimpey (LSE:TW.), which gives a juicy 6.46% yield. That’s significantly greater than the FTSE 100 common.
Macroeconomic situations seem like enhancing for Taylor Wimpey shares. In accordance with Nationwide’s index, January UK home costs noticed their strongest month-to-month progress in a yr, advancing 0.7%.
Moreover, with rate of interest cuts anticipated later in 2024, mortgage charges could proceed to fall. This might alleviate affordability pressures that suppressed housing market exercise in 2023.
Nevertheless, ahead dividend cowl isn’t as sturdy as I’d like at only one instances earnings. This determine’s nicely under the 2 instances a number of that usually signifies a large margin of security.
Nonetheless, I’m a fan of the dividend coverage. It’s linked to property relatively than earnings. Taylor Wimpey goals to “return c. 7.5% of internet property to shareholders yearly, which will likely be at the very least £250m each year”.
For traders eager to look past the FTSE 100 index at particular person dividend shares, I feel Taylor Wimpey deserves consideration.
