Simple Passive Income Ideas for the FTSE 100
Having said that, not all FTSE 100 stocks will experience a resurgence when interest rates fall. Some stocks such as Hargreaves Lansdown can be net beneficiaries of higher rates — not that this is currently reflected in its valuation. But, if selecting wisely, passive income investors can use the macroeconomic forecast to their advantage when investing in the FTSE 100.
Ironically, banks are among the hardest hit by higher rates. That’s because higher interest rates are good for banks until they’re not, as a slew of customer defaults might cause severe damage to FTSE 100 lenders. While this presents a risk in the short term, interest rates have pushed share prices lower and dividend yields higher. In turn, it’s also heightened the potential for share price gains when interest rates moderate.
While the current FTSE 100 dividend yield average is c.3.8%, blue-chip banks including Barclays, Lloyds, and NatWest currently offer yields in excess of 5%. More importantly, these are also some of the stocks with the strongest dividend coverage ratios. For instance, Barclays’ trailing dividend is covered at 4.3x, while Lloyds’s dividend is well covered at 3.0x.
Of course, banks represent just one opportunity for FTSE 100 investors. Housebuilders, unsurprisingly offer some of the highest yields. However, it’d be remiss not to recognise that these FTSE 100 stocks may carry greater risks of underperformance and being forced to cut their dividend. For instance, Barratt currently offers an 8.4% dividend yield, but it’s unclear whether the dividend remains affordable with the sector suffering.
Even so, given the strong financials of most FTSE 100 companies and their rich history of dividends, the long-term still looks favourable for those seeking passive income. On that basis, it might be worth considering investing more in UK stocks while the market remains weak, as a potential rebound could happen at any time.
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