As an older investor (I’m almost 54 years old), I’m always on the lookout for additional passive income. This unearned income is money I earn effortlessly, even while sleeping. Indeed, as investment billionaire Warren Buffett wisely noted: “If you don’t find a way to make money while you sleep, you will work until you die.”
But in today’s world where interest rates are close to zero, it is much more difficult to earn passive income than it was, say, 15 years ago. Thus, to increase income, I do not invest in low-yield bonds or keep a lot of money on deposit. Instead, I invest in British stocks that pay high dividends. Dividends are cash dividends that companies pay to shareholders, usually semi-annually or quarterly. However, dividends are not guaranteed. They can be cut or scrapped during bad times, as happened on a large scale in 2020. When we eventually retire, my wife and I will use our shares to increase our monthly pension.
Passive income from high-yield stocks
Currently, United Kingdom FTSE 100 The index offers a dividend yield of 4% annually. But some stocks within the index produce much higher passive income. However, the higher the dividend yield, the higher its risk (all else being equal). In my experience, dividend yields above 10% per year don’t last. Either the stock price goes up or the payout is lowered so the dividend yield goes down.
Earlier today, I found these 10 FTSE 100 stocks to offer a current dividend yield above 6% annually.
|BHP . group||Mining||9.9%|
|persimmon||building a house||8.2%|
|Legal and public affairs||Financial||6.0%|
Should I buy it? First, I would never build a portfolio consisting only of these 10 high-earning stocks. To avoid concentration risk, I would spread my money on at least 25 different stocks. Otherwise, one bad result could hit the total value of my portfolio. Second, this mini-portfolio of 10 stocks is heavily skewed towards only three sectors. Four components are mining companies and two are tobacco companies, while the other two are financial companies. Thus, there is not enough diversity among these 10 stocks to build a strong and reliable passive income stream from dividend yield.
However, I wouldn’t worry too much if I put, say, 1% or 2% of my portfolio value into each of these 10 stocks (10% to 20% in total). After all, the average dividend yield across all ten is about 8.8% per year, which certainly appeals to me. In fact, investing £1,000 in each share (£10,000 total) would produce a passive income of around £876 per year. Nice.
Which of the following 10 dividend stocks should I buy?
When I worry about the upcoming crash in the stock market, I’m drawn more to what I call “BBC stocks”. These are stocks in big, beautiful and prudent companies, usually members of the FTSE 100. In previous stock market crashes, I’ve found that big cap stocks that have paid generous dividends have fared much better than the broader market. And even when stock prices fell, my dividends mostly lasted during market crashes.
First, for huge dividends as well as exposure to the global recovery in 2022-23, I will buy Rio Tinto Stock is at current 4,883.89p. But I expect mining stocks to be volatile in 2022-23, as they were in 2021. Second, for additional passive income, I’ll also buy Laqsula at 2,726 pixels. Cigarette manufacturers have been a dividend dynamo for decades – despite BAT carrying £40.5 billion of net debt on its balance sheet!
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Cliffdarcy does not have a position in any of the stocks mentioned. The Motley Fool UK recommended British American Tobacco, Imperial Brands and Vodafone. The opinions expressed about the companies mentioned in this article are those of the author, and therefore may differ from the official recommendations we make on our subscription services, such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, we believe that thinking about a variety of ideas makes us better investors.