Stock market

A £20,000 investment in these FTSE 100 stocks could generate passive income of £3,100 by 2034.

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Shares of companies that pay out their earnings as dividends can be excellent sources of passive income. And FTSE 100 There are some stocks with dividend yields of 8% or more.

A £20,000 investment compounded at 8% per annum gives a return of £3,198 per annum after 10 years. But investors should be careful – there’s often more to it than meets the eye.

More production

The dividend yield is significant – £20,000 invested at 8% produces more than £1,000 per year invested at 3%. And compounded over time, it can make a real difference.

After 30 years, an investment of £20,000 compounded at 8% returns £14,900 per year. The same investment growing at 3% yields just £1,400.

The potential rewards offered by high-yield stocks are high, but the risks are often high as well. Vodafone is a good example.

The stock’s dividend yield is 10%, but it is about to be cut in half. In general, a high yield can be a sign that investors doubt that shareholder payouts will be sustainable.

British American Tobacco

on his face, British American Tobacco (LSE:BATS) is a perfect example of this. The stock comes with a 10% dividend yield, but it’s tobacco – how long can it last?

The volume of cigarettes is decreasing and the situation may improve. But tobacco companies have known about it for some time and are taking steps to adopt it.

Here is an example. ZYN – Nicotine pouch manufactured by Philip Morris. Smoke-free products now contribute more than 35% of total revenue and are growing impressively.

British Tobacco has a similar product – Velo – in its lineup. And if it can achieve similar success, high-yield dividends may be more sustainable than investors think.

Legal and General (LSE:LGEN) shares also come with a dividend yield of over 8%. Unlike tobacco, it is not so clear that the life insurance industry is in complete decline.

The bigger risk, though, is pricing businesses for policies that run decades into the future. And it brings the possibility of future losses of unspecified magnitude.

This is the main reason why shares in life insurance companies usually come with huge returns. There is always the risk of an unexpected – negative – surprise.

It is worth noting that Legal & General has a good record of managing its operations and its profitability. And if it continues, investors could do very well with the stock.

Risks and rewards

The FTSE 100 has many stocks with high dividend yields. In many cases, this indicates the possibility of lower future shareholder returns.

Sometimes, stock market things go wrong, though. And if it’s shorting British American Tobacco or Legal & General, there could be big returns for investors.


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