Owning FTSE 100 shares can be a good way to generate a passive income. These large businesses are often able to generate plenty of spare cash each year, supporting attractive shareholder payouts.
I’m aiming to use shares to build a portfolio that can provide a reliable £6,000 income. My aim is to achieve a higher yield than a tracker fund, so I can generate more dividend income from less cash. Today I want to look at three shares I think could help me hit my goal.
How I aim to beat the market
The average dividend yield from the FTSE 100 is currently 3.4%. To generate £6k annually from a FTSE 100 tracker fund, I’d need about £175,000.
However, if I can build a portfolio that generates a 6% dividend yield, I would only need to save £100,000. I could potentially hit my passive income target several years early.
Of course, dividends are never guaranteed and can be cut. Chasing the highest yields in the market can carry extra risks, too. Sometimes these high payouts mean sacrificing future growth.
To avoid too much company-specific risk, I’d aim to build a diversified portfolio of 20 stocks. That way, even if one dividend is cut, the overall impact on the portfolio income will be limited.
Three 6%+ yielders I’d start with
I would never hold just three shares in my income portfolio. It’s simply too risky, in my view. However, I don’t have space to cover 20 stocks in this article, so I’m going to focus on three high-yielding FTSE 100 shares I’d buy today.
My first pick is telecoms group Vodafone, which currently offers a dividend yield of 6.8%. It’s best known as a mobile operator in the UK. But the group is also a large broadband provider in Europe and one of the biggest mobile and fintech companies in Africa.
Vodafone generates plenty of surplus cash each year, but continuous network upgrades mean that spending is high too. I think this will limit dividend growth. But I don’t see much risk to the current payout, so I’d be happy to buy Vodafone shares for income.
The second stock I’d consider is tobacco group Imperial Brands. Like most such businesses, it generates high profit margins and huge amounts of surplus cash.
Ethical concerns and concerns over falling smoking rates mean that Imperial stock is rated pretty cheaply these days. The shares currently trade on just six times forecast earnings.
That modest rating gives the stock an 8.9% dividend yield that’s backed by genuine surplus cash. For this reason, I would be happy to buy more Imperial shares for my portfolio at current levels.
The final dividend stock I’d like to highlight is life insurer Phoenix Group. This business isn’t a household name because its specialty is bulk-buying existing policies from other insurers and running them to completion.
Phoenix is now targeting a move into the retail business via the Standard Life brand, which it now owns. It’s too soon to say how successful this will be, but my sums suggest the group’s cash-backed 7.2% dividend yield is pretty safe at the moment.
In my view, Phoenix is one of the safest high yielders in the FTSE 100. It’s certainly a stock I’d be happy to own.
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Roland Head owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.