The idea of earning money without working for it – often known as passive income – has obvious appeal. But could the sort of blue-chip shares seen in the flagship stock market FTSE 100 index pay me the sort of dividends I could use to generate meaningful passive income streams?
I think they could. In fact, in some cases, that is perhaps more likely at this point than at any time in the past decade. Let me explain why.
Historically high yield
As an example, consider Vodafone (LSE: VOD). Well-known as a mobile and data network provider in the UK and a host of markets overseas, the business benefits from a strong brand, large customer base and resilient demand for telecom services.
Yet the FTSE 100 share has fallen to 30-year lows during the past 12 months.
That sort of decline does not usually happen for no reason. I certainly think Vodafone faces risks. It has a lot of debt, for example. It has been selling off businesses in a move that could hurt both revenues and profits in future.
But while a share price fall may not look good for existing shareholders, it does mean that a steady dividend represents a higher percentage of the purchase price than used to be the case.
In other words, while the dividend at Vodafone has been flat for years, the dividend yield has grown. It is now the highest of any FTSE 100 share, at 11.6%.
Passive income opportunity
From the perspective of earning money without working for it, that sort of yield could turn out to be very lucrative for me.
Investing £1,000 in Vodafone shares today ought to earn me around £116 of dividends annually. On top of that passive income potential, if the share price starts to regain some ground again, the value of my holding could grow (though having fallen this far, the shares could keep going down).
I would not buy Vodafone, or any other FTSE 100 share, just for its dividend yield. After all, dividends are never guaranteed. Vodafone has cut its in the past and could do so again.
But as I see it as a strong business selling at an attractive price, I would be happy to buy its shares if I had spare cash. Indeed, I did just that last year. The possibility of big dividends adds to its appeal for me.
Seizing the opportunity
While Vodafone’s double digit yield is unusually high, quite a few FTSE 100 shares also offer atypically high yields at the moment.
Dividend Aristocrat British American Tobacco, for example, yields 9.7%. Its share price in the past 12 months has touched levels last seen well over a decade ago, in 2010.
The tobacco manufacturer has raised its dividend annually since then, meaning the past year has seen a yield on the shares above that available for a long time.
Will such yields last? I do not know. Like Vodafone, British American faces risks to profits, such as declining demand for cigarettes.
But if I could build a portfolio of shares in great companies at attractive prices and earn passive income to boot, I would be happy to do so. In fact, that is exactly what I am doing right now!
