I’m building up a portfolio of FTSE 100 stocks to generate a high and rising passive income for my retirement. Today, it is possible to get yields of 5%, 6%, 7%, or more from solid UK blue chips. They aren’t completely without risk — no stock is — but they’re at the safer end of the scale.
Better still, well-run dividend-paying companies aim to increase their shareholder payouts over time. This doesn’t just give me passive income, but a rising passive income, too.
A high dividend yield can sometimes prove unsustainable. Yet I think the following three have a decent chance of lasting the course.
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Top stocks for me
Lloyds Banking Group (LSE: LLOY) is turning into the bedrock of my portfolio. It may seem an odd choice, given how badly the banking sector has been performing for years. Happily, I missed all that. I bought my first stake in Lloyds just one year ago, and topped it up three times over the summer.
Lloyds shares currently yield 5.3%, covered three times by earnings. Next year they are forecast to yield 6.1%, with cover still healthy at 2.7 times. I would expect that growth to continue and who knows, at some point the Lloyds share price might rise, too.
Investors have been waiting a long time for that day. Yet I think as interest rates start to fall and it becomes clear that we are going to avoid a housing meltdown, Lloyds could take off. Plus it’s dirt cheap trading at 6.2 times earnings.
I don’t hold mining giant Rio Tinto (LSE: RIO) but I’m desperate to buy it before the next upwards leg of the commodity cycle. Natural resources producers have become heavily dependent on Chinese demand, the country has eaten up around 60% of all sales. China’s economic troubles are no secret, so that source of demand is not what it was. That is reflected in the recent poor performance of Rio Tinto’s shares.
A good balance
With the world on the edge of recession, demand could even fall further. Yet that is reflected in Rio Tinto’s valuation of just 8.33 times earnings. It yields a generous 7.2%, covered 1.7 times. That is forecast to dip slightly to 6.1% next year, but still looks generous to me. I like buying shares on weakness, and now could be a good time to buy with a long-term view.
I’d complete my high-yield passive income portfolio with housebuilder Barratt Developments (LSE: BDEV), before its share price rises even further. Like Lloyds, Barratt is also benefiting from expectations that interest rates have peaked, as that should boost property sales and prices. Or at least stop them from crashing.
The stock is still good value despite its strong rebound, trading at 7.8 times earnings. It still pays generous income of 6.4%, covered precisely twice by earnings.
Conditions aren’t easy. Barratt’s first-quarter completions fell 10%, but I think given today’s shortages, housebuilders should remain resilient. We need them too much.
If I invested my full £20,000 Stocks and Shares ISA allowance equally across these three stocks, I’d get an average yield of 6.3%. That will give me income of £1,260 in year one and with luck, it should steadily rise over time.
