Is the FTSE 100 good for passive income?

Those who invest for passive income will be interested to learn that the FTSE 100, according to those who look after the index, currently (9 May) offers a yield of 3.58%. This is based on amounts paid over the past 12 months.

Number crunchers appear to agree this is higher than all other major global stock market indexes, although Australia’s ASX 200 is a close second.

In 2025, AJ Bell reckons members of the FTSE 100 will pay £83bn in dividends. This implies a forward yield of 3.7%. The investment platform claims that analysts are forecasting 89 Footsie stocks to increase their payouts this year.

This is good news for investors like me, who prefer to buy UK shares. Of course, dividends are never guaranteed. But in my opinion, the index provides some excellent passive income opportunities.

Returns can differ significantly

However, the average yield hides a wide disparity in shareholder returns.

For example, some companies — including a number of household names — fall well short. Rolls-Royce Holdings is currently yielding 0.75%. At 0.8%, Marks and Spencer fares little better. However, I should point out that, over the past 12 months, the share prices of these two British icons have risen 83% and 34%, respectively.

Polar Capital Technology Trust doesn’t pay anything, preferring to use its surplus cash to buy more shares in other companies.

Top of the pile

At the other extreme, three savings and investment groups offer returns close to 9%. M&G Group (9.3%), Phoenix Group Holdings (9%), and Legal & General (LSE:LGEN) (9%) are the top three on the index.

And the prospect of earning a return of 9% a year is the principal reason – but not the only one — why I recently bought shares in Legal & General.

The group has established a reputation as a reliable dividend payer.

It’s one of just 19 current members of the FTSE 100 that haven’t cut their dividend during the past decade. In cash terms, the payout declared for its 2024 financial year is 21.5% higher than it was in 2020. It’s also promised to increase this by 2% a year from 2025 to 2027.

More factors

But there are other reasons why I took a stake.

Because of the long-term nature of its customer contracts, the group’s able to estimate that it has £14.8bn of “stored value to be released into profit over the coming years”. At £13.9bn, its current stock market valuation is 6% below this figure.

Although profit doesn’t necessarily translate into cash on a pound-for-pound basis, this does suggest the shares are undervalued.

And if the group can continue to win new business, its share price should do well. Its Institutional Retirement division is “actively pricing” £17bn of new deals and has “visibility” on a further £27bn.

However, the group operates in a highly competitive industry with its rivals offering generous incentives for savers and investors to switch their assets.

And like those of us who invest in the stock market, it can suffer from global economic uncertainty. At 31 December 2024, the group had £201.3bn of equites on its balance sheet as well as £235.6bn of debt securities.

Despite these challenges, I think Legal & General’s in a good position to grow strongly over the coming years. And even if it doesn’t, its above-average dividend will help compensate me for any disappointment.

The post Is the FTSE 100 good for passive income? appeared first on The Motley Fool UK.

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See the full investment case

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James Beard has positions in Legal & General Group Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Aj Bell Plc, M&g Plc, and Rolls-Royce Plc. 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.