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The current FTSE 100 average dividend yield is 3.15%. The same figure for the FTSE 250 is marginally higher at 3.54%. Yet, for investors looking to build passive income, active management can help to provide a yield that’s over double the index yield. Here’s how a portfolio could look and the potential monetary benefits.
Factors to consider
Given that the index average yield takes into account all the constituents, it’s not surprising to find some high-yielding options to consider. In fact, there are half a dozen FTSE 250 companies with a yield greater than 10% right now!
Of course, simply buying the highest-yielding shares for a portfolio isn’t always the best move. This is because a yield can rise sharply when the share price falls rapidly. In this case, the dividend might not be sustainable, as it might be cut due to the problems causing the stock fall.
A happy median can be found. I think it’s reasonable to pick stocks yielding around 7%, which strikes an acceptable balance between risk and income potential. To then work out how much this can make an investor, it really depends on the level of investment and the time scale.
Talking numbers
For example, if someone put away £500 a month for 15 years with this yield, it could mean that in year 16, the person could enjoy £980 a month in income. In contrast, if the amount was reduced to £100 and left to compound for only three years, the following year it could be only £28 a month.
Typically, allowing a portfolio to compound for a longer period boosts its overall value. However, it’s worth remembering that dividends aren’t guaranteed from a company. This means that predicting income many years down the line can be tricky.
Rapidly growing income payments
One example of a stock that could be used as part of building this portfolio is TP ICAP Group (LSE:TCAP). The financial services broker currently has a dividend yield of 6.78%, with the stock down 5% in the past year.
The business makes money by acting as a financial intermediary between banks and other institutions. It earns a commission in the process, meaning that the more trades it makes, the more revenue it generates. That’s why in the latest quarterly update earlier this month, it didn’t surprise me to see revenue up 3% even compared to a strong equivalent quarter last year. The stock market has been very volatile over this period, providing plenty of opportunities for the firm.
In terms of dividends, it has a strong track record of growing payments. For example, last year it paid out 16.10p per share. This is easily over double what was paid back in 2020. Given management’s desire to keep income flowing through dividends, I don’t see any big risk of a dividend cut anytime soon.
In terms of risks, TP ICAP operates in a very competitive market on thin margins. If it loses some key clients to other firms or experiences pressure to reduce commissions to retain business, its finances overall could be impacted.
Ultimately, I think it’s an income stock worth considering for investors looking to boost passive income.
