I could spend £6,000 on a couple of luxury holidays in 2024. Alternatively, I could turn that sum into a lifelong passive income. For me, that’s not a difficult dilemma. I’d much rather have a payout every year for the rest of my life than a few weeks frolicking in the sun.
I’d aim to generate £420 every year by investing in FTSE 100 shares. The simplest way would be to buy an exchange-traded fund (ETF) that tracks all 100 of the mega-cap companies listed on the London Stock Exchange.
In general, the UK index offers good value right now, with a price-to-earnings (P/E) ratio of 11, compared to its long-term average of 15, or the US S&P 500’s P/E of 26.
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The advantage of this approach is that it would give me well-balanced exposure to a hundred multinational companies, each in a different sector.
However, I think I could do even better by trying my hand at picking an individual stock for my £6,000 investment.
A dirt cheap stock
I believe Glencore (LSE:GLEN), a FTSE 100-listed mining giant, could be just what I’m looking for. The company produces metals, minerals, crude oil, coal, and natural gas.
While its emphasis on fossil fuels could set off alarm bells given the ongoing green revolution, I’m not worried. It’s true that the International Energy Agency (IEA) forecasts coal demand to fall by 2.3% over the next three years. But that’s in comparison with 2023, which marked an all-time high in consumption of this dirty fuel.
People in developing countries largely do not have the household budget or the national infrastructure necessary to transition away from fossil fuels any time soon. Meanwhile, institutional investors whose hands are tied by ESG standards are dumping oil, coal, and gas producers from their portfolios. The result is that such companies are cheap, possibly giving me a chance to get a market-beating return.
Glencore looks very good value indeed when compared with its FTSE 100 mining peers, Rio Tinto and BHP.
Its price-to-earnings (P/E) ratio is 7.9, significantly lower than Rio Tinto’s 17.5 and BHP’s 13.4.
In the dividend yield arena, Glencore again outperforms its counterparts with 7.3%. This is significantly higher than Rio Tinto’s 4.33% and BHP’s 4.98%, making Glencore a more attractive choice for dividend-seeking investors.
Running the numbers
If I allocated the £6,000 to Glencore, assuming an average dividend yield of about 7%, I would initially generate an annual passive income of around £420, equating to about £35 per month.
Over time, I could significantly bump up that passive income if I reinvested the dividends, allowing the magic of compounding to do its trick.
Assuming Glencore kept paying out 7% for 20 years, I could end up with a pot of £23,220 by reinvesting each year. I could expect that beefed up sum to return me a whopping £1,625 per year, or £135 per month, if the yield remained at 7%.
Investing in a company like Glencore does come with plenty of risk. The commodities and mining sectors are known for their volatility and sensitivity to regulatory and environmental changes. Such factors can influence operational dynamics and, subsequently, the stock performance and dividend payouts.
Still, I’m looking to add the shares to my portfolio when I next have spare funds to deploy.
