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Why the FTSE 100 is my number one choice for passive income

Passive income text with pin graph chart on business table
Image source: Getty Images

So, the UK stock market is falling again. It could drive long-term passive income seekers away from shares. But I think that would be a mistake, and I want to explain why.

At times like this, a Cash ISA might look like a better bet. Some offer around 4% interest right now, at least for one-year fixed terms. That’s guaranteed and safe.

But returns like that can’t last when Bank of England interest rates come down again.

FTSE falling

The FTSE 100 is dropping, and investors lost money last week. If we suffer a further crash, we could be wiped out, couldn’t we? And that wouldn’t get us much cash when we retire.

But it’s all about timescales and diversification. I fwe get those right, I reckon we’ll greatly minimise the risk of losses. And we’ll boost our chances of generating solid passive income.

ISA millionaires

Investing in a Stocks and Shares ISA has so far produced more than 2,000 millionaires in the UK. And I’ll tell you what I think most of them are doing now the Footsie is dipping.

I reckon they’re buying as many new shares as they can right now.

What shares do the ISA millionaires go for? That’s easy to answer.

According to ISA providers, they’re buying shares in Aviva, National Grid, Shell, GSK… The top share buys are in FTSE 100 stocks with track records of growth and dividends.

Top ISA returns

OK, so I’m not a millionaire. Most of us aren’t. But we could still benefit from Stocks and Shares ISA returns. Over the past 10 years, average returns came in at 9.6%.

Anyone with £10,000 could be pocketing £960 per year in passive income at that rate. And if we can build a £50,000 investment pot, we could draw down £4,800 per year.

Now, I don’t expect to get that rate every year. The arrival of Covid resulted in a 13% loss in the 2019-20 year. And that could well happen again. In fact, some years of losses are near certain.

Realistic target

But I think a target of around 7% could be achieved. And it’s largely in line with the long-term average from the UK stock market.

That means £50,000 in a Stocks and Shares ISA could deliver £3,500 per year. I’d sure like to have that coming in to top up my pension when I retire.

And right now, I see some top income shares going cheap. The forecast M&G yield is up to 8.5%. Barratt Developments is on a yield of 8%. And at Rio Tinto, we’re looking at a 7.1% yield.

Cheap shares

All of the FTSE 100’s top yields are that bit better now that share prices are dipping.

Buying the shares I mention here would put us on the way to a diversified selection too. That way, should any one sector fall, we’d have some protection.

Over the short term, dividends could fall. But I think it’s the best way to passive income. Buy FTSE 100 shares from a range of sectors, and hold for the long term.

The post Why the FTSE 100 is my number one choice for passive income appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Aviva Plc. The Motley Fool UK has recommended GSK. 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 2023