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The average dividend yield of the FTSE 100 is 3.28%. So, for an investor who has a diversified portfolio of stocks from the index, I’d expect the passive income percentage to be around this level. However, with the UK base rate at 4.25%, some might feel that stocks aren’t the best way to generate a good yield. Yet if they just targeted high-yield shares instead, here’s how things could look.
Making the numbers work
When I’m talking about high-yield options, technically, I’m referring to any stock that yields above the average. But in reality, I’m focusing on shares in the bucket that yield between 6% and 9%. Of course, it can include options that yield above 10%. But I’m always a bit cautious of stocks that offer that much. Historically, it’s hard to maintain a yield above this level for an extended period of time. Yet even though high-yield stocks in general are higher-risk than others, an investor can still find sustainable shares in this segment.
For example, an investor could put £500 a month in dividend stocks. Over time, they can build up a portfolio of different stocks in the 6%-9% range. This could provide an average yield of 7.5%. After a decade of maintaining this and reinvesting the dividends, the results in the following year could be impressive. In year 11, it could yield £7,199 just from income. This would translate to just under £600 a month.
Obviously, the exact amount that could be earned using this strategy depends on how much someone invests. It’s also dependent on the companies in the portfolio sustainably paying out income for years.
Transformation in full flow
One for consideration in this strategy is Aberdeen Group (LSE:ABDN). This UK-based global investment company has a dividend yield of 7.5%, with the stock up 14% in the past year.
The company has been undergoing a transformation, having experienced some tough years recently due to investor outflows. When assets under management decrease, Aberdeen generates less revenue. After all, its main operating model is charging fees and commissions on the money being invested.
Yet things are changing. The latest half-year results showed an IFRS profit before tax of £271m, up 45% from the same period the previous year. Even though the dividend per share was left unchanged, it’s a good sign for future income payments. If profits are rising, it provides more funds to distribute to shareholders over time.
The report noted that the “transformation programme achieved £137m of run rate savings by end H1 2025, on-track to deliver target of at least £150m of annualised cost savings by the end of 2025.”
Against a backdrop of lower costs and higher profits, I think the dividend is sustainable going forward.
One risk is volatile markets. If we see another stock market crash, it could cause investors to pull their money. This in turn would lower revenue for the group. But I still see it as one to consider.
This story originally appeared on Motley Fool
