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Investing in FTSE 100 shares can be a great way to make a huge passive income over time.
Its huge selection of multinational ‘old world’ stocks like banks, miners, and consumer goods manufacturers enjoy strong positions in established markets. This typically provides strong earnings growth during the long term and robust balance sheets, an essential combination for those seeking consistent dividends.
There are plenty of ways investors can mine the Footsie for a second income. Here are three investments I think savvy dividend hunters should consider right now.
High yield
The first FTSE 100 stock to look at is Phoenix Group (LSE:PHNX). At 10.3%, it has the largest forward dividend yield on the index today.
While dividends are never guaranteed, high yielders like this can — if broker forecasts prove accurate — provide a huge stream of income for investors to live off or reinvest. If they choose the latter, someone can supercharge their long-term wealth-building with bigger dividends thanks to the miracle of compounding.
Dividends aren’t guaranteed, and threats like rising competition or changing regulations could impact future payouts. But I’m confident Phoenix’s growing market opportunities and strong cash creation will continue delivering market-beating payouts.
Its shareholder capital coverage ratio was 168% as of last June, providing dividend forecasts with added steel.
Dividend grower
Successful dividend investing isn’t all about hunting large (and realistic) dividend yields, though. Successful passive income chasers also seek companies that can grow dividends over time.
This quality can offset the eroding impact of inflation on dividend income.
Safety product manufacturer Halma (LSE:HLMA) is one such company with a brilliant record of payout growth. Annual cash rewards have grown every year for 45 years. But this isn’t all: at at least 5% each year, dividends have risen at a healthy rate over the period.
This included a 7% year-on-year hike in the last financial year (to March 2024).
The forward dividend yield isn’t the biggest, at 0.8%. But this wouldn’t put me off if I had cash to invest today.
Phenomena like tightening safety regulations and efforts to tackle climate change could lead to further impressive profit and dividend growth. There’s also scope for more earnings-boosting acquisitions, although be aware that additional action on this front creates execution risk.
Risk reducer
A final way for investors to target dividends is by buying an exchange-traded fund (ETF) like the iShares FTSE 100 ETF.
Why? A diversified product like this can, through exposure to scores of blue-chip companies, minimise the impact of dividend problems at one or two companies on overall returns.
For instance, a diving oil price may damage earnings at BP, causing it to cut dividends. But the dozens of other high yielders the fund holds (like Lloyds, Aviva, Glencore, and Taylor Wimpey) help to offset the impact of weak crude prices and falling payouts from oil producers.
The dividend yield on this iShares product stands at a healthy 3.5%. On the downside, it could fall in value during a broader market downturn. But the prospect of reliable long-term dividends still make it worth serious attention in my book.
