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I hope to enjoy a comfortable retirement by generating a six-figure second income from a portfolio of FTSE 100 dividend stocks.
Now looks like a brilliant time to buy them, as many are really cheap while offering inflation-busting yields. With luck, I might even bag some capital growth once the global economy recovers and market sentiment rebounds.
I ramped up my strategy a year ago, when the FTSE 100 was sliding to around 7,250. This seemed like a brilliant opportunity to pick up bargain stocks, when they were out of favour and therefore cheap.
FTSE 100 value
Today, with the FTSE 100 around 1,000 points higher at 8,317, I’m glad I took the plunge.
I don’t expect big dividend stocks to shoot the lights out share-price-wise, but some have done nicely. My shares in housebuilder Taylor Wimpey (LSE: TW) are up 20.41%, since I started buying them last September. Over 12 months, they’re up 26.72%.
This figure does not include dividends. On 14 May, Taylor Wimpey sent me £158.78. That’s on top of the £79.84 I got on 17 November. So that’s £238.62 in total.
I’m hoping it will continue to deliver a steady stream of dividends that rise over time. I’m encouraged by the fact that it has maintained payouts even though higher mortgage rates have hit property completion and prices.
Taylor Wimpey’s pre-tax profits fell 42.8% to £473.8m in 2023, with revenue down 20% to £3.5bn. But still the share price climbed, and the dividend came through. The board recently reported a promising first quarter, so fingers crossed. When the first interest rate cut lands, I suspect its share price may jump again.
So how do I turn dividends of just a few hundred pounds into a £100k passive income, as suggested in the headline? It seems a big leap.
Benefits of reinvesting dividends
First, Taylor Wimpey isn’t the only company sending regular chunks of money without me having to do anything apart from hold its shares.
Last Wednesday, FTSE 100 insurer Phoenix Group Holdings sent £137.24. The day before that, Lloyds Banking Group paid me £172.09. On 15 May, Just Group handed me £36.55. I got £408.27 from wealth manager M&G on 9 May.
I’ve reinvested every penny, which means I’m now holding more of these companies’ shares. They will hopefully generate further dividends in future. I’ll reinvest those too. And potentially receive even more dividends as a result. It’s important to state that dividends aren’t guaranteed. Nothing is when buying shares, but the potential rewards make the risk worthwhile.
Let’s say I invest £10,000 a year in a spread of stocks, and increase that by 5% a year to keep up with inflation. If I matched the FTSE 100 long-term total return of 6.9% a year, after 30 years I’d have £1,732,766.
If my portfolio yielded 6% a year, as my current one does, I’d get income of £103,966. Inflation means it will be worth less in real terms than today, but it’s still a mighty return. Every time Taylor Wimpey and the rest pay me a dividend, I’m a few hundred pounds closer to my target.
