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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 era.
Whereas the FTSE 100 woefully underperformed the S&P 500 over the previous decade, when it comes to capital progress, it’s traditionally supplied a a lot increased dividend yield. For traders who prioritise incomes common money payouts from the inventory market, the Footsie is likely to be the higher selection.
So how a lot passive earnings may I earn from a £10k funding? What concerns ought to traders keep in mind? And are there higher alternatives in particular person shares?
Monitoring the index
A great way to spend money on 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 just a little over £10k to speculate, traders may buy 302 items right this moment. On the present yield, that might 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 corporations reducing their payouts.
Plus, it’s value noting how enticing 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 international publicity to shares “that pay dividends which can be usually increased than common“. But its 3.31% yield doesn’t beat the Footsie!
That stated, traders in search of progress are prone to be disenchanted. 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 the most effective performing FTSE 100 inventory final 12 months was Rolls-Royce, which delivered a outstanding 221% share worth acquire. The British aerospace large doesn’t presently situation dividends.
A inventory to think about
Whereas broad diversification’s necessary, there are additionally probably vital advantages in sifting by means of the index to establish particular person high-yield dividend shares.
One firm I spend money on is housebuilder Taylor Wimpey (LSE:TW.), which gives a juicy 6.46% yield. That’s significantly increased than the FTSE 100 common.
Macroeconomic circumstances seem like bettering for Taylor Wimpey shares. In keeping with Nationwide’s index, January UK home costs noticed their strongest month-to-month progress in a 12 months, advancing 0.7%.
Moreover, with rate of interest cuts anticipated later in 2024, mortgage charges might 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 occasions earnings. This determine’s properly under the 2 occasions 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 moderately than earnings. Taylor Wimpey goals to “return c. 7.5% of web property to shareholders yearly, which will probably be not less than £250m every year”.
For traders eager to look past the FTSE 100 index at particular person dividend shares, I believe Taylor Wimpey deserves consideration.