How I’d invest £20,000 to generate a passive income for life

Investing for long-term passive income is my chosen way to provide for financial security. And I’ve been thinking about how I’d invest the equivalent of an ISA allowance, £20,000, today and what returns I could hope to get from it.

I would invest it mostly in FTSE 100 shares, specifically ones I rate as safe and which pay good dividends. But when I say good dividends, I don’t necessarily mean the biggest.

If I’d put £20,000 into Evraz a year ago, for example, I’d have expected a fat double-digit dividend yield. But after the Russian invasion of Ukraine, Evraz stopped its dividends and trading in the shares was suspended.

FTSE 100 yielding 4%

That emphasises the need for diversification. The FTSE 100 currently looks set to deliver a yield of close to 4% in 2022, which is better than I’d get from a savings account. If I could diversify across the whole of the index, every £20,000 I invest should deliver an annual passive income of around £820 — even without any share price gains.

The FTSE 100 includes a lot of stocks that pay little or nothing in dividends. So if I go for the bigger yields, I’d expect to do better than that. And there’s one indirect way I invest in FTSE 100 shares, with wide diversification, and beating the index average.

It’s City of London Investment Trust. The trust offers dividend yields of close to 5%. And it has lifted its dividend every year for the past 55 years. Its biggest holdings are FTSE 100 shares, including British American Tobacco (2021 dividend yield 7.9%), Rio Tinto (12%) and HSBC Holdings (4.1%). City of London would get a large chunk of my £20,000.

Bigger dividends

I’d also go for either British American or Imperial Brands (8.9% in 2021). I’ve always liked Rio Tinto too, so I’d have some of that for the big dividends. But I’d also keep in mind that the mining business is cyclical and the payments won’t always be that high.

I’m bullish about the long-term prospects for housebuilders. So my passive income portfolio will always have room for one. I currently own shares in Persimmon, which handed over a total dividend in 2021 worth a very nice 8.2%.

With dividends like these on offer, I think it’s entirely possible to generate a passive income from FTSE 100 stocks of 6-7% per year. So every £20,000 invested could generate between £1,200 and £1,400 per year.

Passive income reinvestment

To make returns like these really work for me, in the years before I retire and need the income, I would reinvest all my dividend income. And I’d expect that to help build me some significant capital growth over the decades too.

Of course, I do need to keep my feet on the ground and recognise the risks. Dividend yields like these are far from guaranteed, and are sometimes cut. To reduce the chances of that hitting my passive income, I look for companies whose earnings are good enough to cover their dividends comfortably.

I think that is generally the case with my favourites here, though I know I will suffer some disappointments. But I can’t think of a better way to invest.

The post How I’d invest £20,000 to generate a passive income for life appeared first on The Motley Fool UK.

More reading

2 penny stocks to buy in April and hold until 2030!
The Scottish Mortgage share price is rising: should I buy now?
My 3-step passive income plan to buy cheap dividend shares
I’ll fight inflation by investing in these 2 FTSE 100 dividend stocks yielding 8%
3 FTSE 100 stocks I’ll be watching in April

Alan Oscroft owns City of London Inv Trust and Persimmon. The Motley Fool UK has recommended British American Tobacco, HSBC Holdings, and Imperial Brands. 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.