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How I’d start earning passive income from FTSE 100 shares today

Peter Stephens
·3-min read

Investing money in FTSE 100 shares could be a worthwhile means of making a passive income in 2021. The index offers a dividend yield of around 4%. That’s considerably more than the income return available on other mainstream assets.

Furthermore, dividend growth opportunities could improve in the coming months. Through buying a diverse range of high-quality UK shares, an investor could earn a robust and growing income in the long run.

Buying a diverse range of FTSE 100 shares

Given the uncertain economic outlook, it’s perhaps more important than ever to diversify among FTSE 100 shares when making a passive income. After all, political risks are high and the coronavirus pandemic looks set to remain present throughout at least part of the current year.

This could mean many companies face challenging periods that may impact on their ability to pay dividends. Company management may be forced to reduce dividends as part of a cost-cutting programme.

An investor who has a limited number of income stocks in their portfolio could suffer if one or two of them make cuts to shareholder payouts. By contrast, a portfolio that contains a wide range of stocks could prove to be more resilient. Especially when it comes to earning an income in the coming months, as well as over the long run.

Focusing on high-quality shares for a passive income

High-quality FTSE 100 shares may also offer a more attractive passive income. Clearly, defining ‘high quality’ is subjective. Different investors are likely to have differing views on what represents a high-quality stock. However, it could include those companies with affordable dividends, solid financial positions and wide economic moats.

They may be less likely to cut dividends, and more likely to increase them, as the year progresses. For example, they may generate improving financial performances as the economy recovers. Similarly, they may be able to invest in new growth areas or different market segments. That way they could successfully adjust to a changing world economy after the coronavirus pandemic ends.

Dividend growth opportunities

It’s tempting to buy FTSE 100 shares with the highest yields for 2021. But purchasing companies that have dividend growth potential alongside a generous yield could be a sound move. They may provide a higher passive income over the long run, since their dividend growth rate may make up for a lower yield today relative to other UK dividend stocks.

Of course, dividend growth rates are likely to be closely linked to financial performance. As such, buying companies with clear growth potential, possibly due to industry-wide growth trends present in their sector, could prove to be a sound move.

Over time, they may offer a higher income return, as well as scope for capital growth, as investor demand for successful businesses increases in a likely economic recovery.

The post How I’d start earning passive income from FTSE 100 shares today appeared first on The Motley Fool UK.

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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.

Motley Fool UK 2021