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Buying into proven blue-chip FTSE 100 businesses that look set to pay dividends in future is one way to try and earn passive income
It is an old passive income idea, already used by hundreds of thousands of investors.
No dividend is ever guaranteed to last, even at a FTSE 100 company with a long track record behind it. So it is helpful not only to consider carefully what shares to buy, but also to diversify.
Say someone had £10k to invest. Spreading it evenly over the five FTSE 100 shares below would give an average yield of 5.9%.
That would equate to £590 in passive income per year. I think each of these shares is worth considering right now.
Consumer goods companies
A lot of the high yielders in the index are financial services companies – and I will come to that sector below.
But remember, diversification is important. Some consumer goods companies worth considering in the FTSE 100 also offer attractive yields.
While not all investors are comfortable owning tobacco shares, for those that are, British American Tobacco’s 6% yield is noteworthy.
That is double the FTSE 100 yield – and the company aims to keep growing its payout per share annually, as it has done for decades already.
Its premium brands give it pricing power, but ongoing falls in cigarette use are a risk to both revenues and profits.
Vanish maker Reckitt Benckiser has seen 15% of its share price vanish over the past five years, when the wider FTSE 100 index has moved up by 52%. Ouch.
Still, the 4.3% yield is attractive. I believe the company’s premium brand portfolio and proven business model can help support the payout.
Reckitt has struggled with a disastrous nutrition formula acquisition a few years back and that remains a risk to performance. Over the long term, though, I see it as an attractive business.
Financial services shares with high yields
In the financial services sector, insurer Aviva yields 5.7%.
Since a 2020 dividend cut, it has grown the payout handily — and aims to keep doing so.
Aviva’s market-leading position is a strength, though price competition from smaller rivals hurting profit margins is a risk.
FTSE 100 asset manager M&G (LSE: MNG) yields 5.9%.
The yield has been more attractive in the past: the share price growth of 35% over the past year far outstrips recent dividend growth.
Still, at close to double the index average, I see the yield as attractive – and M&G aims to keep growing its payout per share annually.
Just last week, the company announced an interim dividend of 6.8p per share – a modest increase on last year’s interim of 6.7p.
With its strong brand and large customer base, M&G has strengths.
One risk in recent years has been clients pulling more money out of its funds than they put in, so I was pleased to see in the interims that net flows from the company’s open business were positive, at £2.4bn.
I still see client outflows as a risk, but on balance am upbeat about M&G’s prospects.
Finally comes Legal & General. Its 7.6% yield is the highest of any FTSE 100 share.
Its business model is proven to be highly cash generative. But I see a risk that choppy markets could provoke investors to pull out funds, hurting profits.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
