In a world of rising inflation with real wages not keeping up, I need to make my money work hard. There are many potential options to try and make passive income. These include bonds that pay coupons, buy-to-let property that generates rental income and FTSE 100 stocks that pay dividends. In terms of the best side hustle, I think FTSE 100 stocks are the way forward. Here’s why.
Banking on FTSE 100 stalwarts
The FTSE 100 index is comprised of the largest listed companies by market capitalisation. Although there’s no guarantee, it should mean that the firms are financially stable. AIM-listed companies and small-caps typically are higher-risk options for investing (albeit with potentially higher returns).
When I’m targeting dividend income, I want to focus on the larger companies that have a long track record of being profitable. After all, there’s little value in me making achunky income this year but having none the year after.
For example, there are currently 11 stocks in the index that have over two decades of consecutive dividend growth. This is the type of stock in which I want to invest.
High yield potential
Another reason why I like FTSE 100 stocks for passive income is the generous yields. When I consider comparable rates that I could earn on alternative products, few can compare to FTSE 100 constituents.
For example, I can find options in finance such as M&G and Abrdn, offering yields above 8.5%. The volatility in commodity stocks has helped to push yields higher too. Rio Tinto has a yield of 14.11%, with Antofagasta at 11.34%.
Don’t get me wrong, the risk with several stocks is higher than some other income options. Falling copper prices have pushed the Antofagasta share price down 23% over the last year. And stock market volatility has caused Abrdn to experience net outflows from investors.
But when I balance up the risk relative to the return, I still vote in favor of dividend stocks.
Share price upside for FTSE 100 shares
Finally, I have the option to benefit from potential share price gains on top of dividend income. It’s true that other options such as buy-to-let can offer me appreciation on my capital. But the ability to buy and sell is much quicker and easier with stocks.
These gains help me to increase my overall amount of income at the end of the day. For example, consider the Glencore share price. In the past year, it has risen by 40%. Yet given the generous dividend per share, the dividend yield is at 5.09%. It shows that I don’t always have to give up growth for income, or vice versa.
One of the main risks I need to be aware of is that just because a stock is in the FTSE 100, it doesn’t mean it’s bulletproof. There are examples of companies (like Polymetal International) that have fallen quickly from grace, despite paying dividends. So I still need to conduct my own due diligence on the stocks before making a decision.