Many people in the UK today are approaching middle age without a reliable second income source. But given how persistent high inflation is, it’s arguably more important than ever to start looking for ways to make extra money. Here’s why I think investing in FTSE 100 stocks today could be the answer.
A perfect storm
The toxic macroeconomic backdrop has made investing a challenge over the last couple of years.
A global recession is looming, inflation is rampant, and geopolitical relations between two nuclear-armed superpowers have deteriorated. Moreover, war has shockingly returned to the European continent for the first time in decades.
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Of course, these events are not new to history. But what I do think is unique is that all these things are happening simultaneously while the world is still recovering from a once-in-a-century global pandemic.
And then, just when it didn’t seem things could get worse, sizeable banks started toppling like dominoes in March. This put shockwaves through the whole global financial system and sent many investors running for cover.
In the UK, there were three prime ministers in the space of two months in 2022. Rishi Sunak is the fifth PM in six years — the fastest turnover of UK leaders in nearly a century. This political chaos caused the pound to plunge to an all-time low against the US dollar last year.
So the past couple of years have been absolutely extraordinary for investors. A perfect storm, even.
Investing through dark clouds
However, continuing to invest through tough times like these can be the best way to generate solid long-term returns. As Warren Buffett famously said: “Be fearful when others are greedy and greedy when others are fearful“.
I know that fear is prevalent when Mr Market shows up offering me what seem to be head-scratching bargains. And on the FTSE 100 today, I’d say there are a few of those.
Take some of the insurers, for example. Legal & General stock has a dividend yield of 8.4% and Aviva has 7.5%, while Phoenix Group sports a monstrous yield of 9%. Each dividend is reasonably well covered at 1.6, 1.6, and 1.5 times earnings, respectively.
Those eye-popping yields have been driven in part by weak share prices. Indeed, the index itself is now yielding 3.7%. That means I could buy a low-cost FTSE 100 tracker today with a dividend yield of 3.7%, and may also make money if and when the index rises.
Calmer waters may be ahead
The International Monetary Fund had predicted that the UK economy would shrink in 2023. Now it’s expecting the economy to grow by 0.4% this year, thereby avoiding a recession, before growing 1% in 2024 and 2% in 2025. Even the pound has bounced back impressively this year.
If accurate, these predictions would be welcome news for UK investors. And while dividends are never guaranteed, I’m encouraged by the fact that most UK company earnings have remained extremely resilient.
Indeed, AJ Bell is expecting Footsie dividend growth of 11% in 2023, then another 7% in 2024.
I don’t know exactly when the storm clouds will part, but I’m confident they eventually will.
Meanwhile, by investing in cheap UK stocks today, I’m increasing the chance of receiving a rising passive income for years to come.
