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3 Easy Ways to Earn a Passive Income From the FTSE 100

Maynard Paton
January 11, 2013

LONDON -- I'm sure you, like me, are attracted to the concept of "passive income" -- essentially receiving regular cash for little or no effort.

In my view, there's no better way to create a respectable passive income than to invest in the stock market. Essentially, you buy some shares and sit back as you collect the dividends they pay -- and hopefully watch your capital grow as well.

That said, all stock market investment comes with risk, and the price and income from any investment can fall or rise. If you can't risk losing your capital or income, shares are not for you!

Here's how to put the theory into practice with three easy ways to earn a passive income from the FTSE 100 (INDEX: ^FTSE) -- the benchmark index that represents the 100 largest companies trading on the London market.

1. Trackers and exchange-traded funds
Method No. 1 is to simply follow the FTSE 100 via a cheap index-tracker. No need to buy a basket of individual shares here -- you just buy a single fund where the underlying portfolio is invested in all the shares that are members of the FTSE 100 index.

One option is the iShares FTSE 100 (LSE: ISF), which is an exchange-traded fund that can be bought and sold just like an ordinary share and whose price tracks the FTSE 100 index up and down. During the last 12 months, this iShares FTSE 100 fund has accumulated cash from major companies such as Royal Dutch Shell and GlaxoSmithKline, and in turn it has paid out dividends totaling 20.27 pence per share. You can buy the iShares FTSE 100 share today for about 609 pence, thereby giving you a potential passive income of 3.3% a year.

2. Employ an expert manager to create your passive income
Of course, you may wish to back an expert who could deliver a passive income that's greater than what you can enjoy from the wider FTSE 100.

One particular expert of note is Neil Woodford, who works for fund manager Invesco Perpetual and controls two of the country's largest dividend funds. If you ask me, Woodford is the best-choice investor for ordinary people wishing to let someone else do their income investing for them. As this article shows, the dividend growth and capital performance from Woodford's portfolios have trounced those of the FTSE 100 during the last 10 years or so. Woodford invests mostly in FTSE 100 companies, and his current favorites include AstraZeneca and Imperial Tobacco.

One way of allowing Woodford to create a passive income for you is through Edinburgh Investment Trust (LSE: EDIN). Similar to that iShares ETF, this investment trust can be bought and sold like an ordinary share, but here the fund's underlying portfolio contains the FTSE 100 shares picked by Woodford himself. Last year, Woodford's Edinburgh trust paid dividends of 22 pence per share, and the price today is 516 pence. So you could earn a 4.3% annual passive income from Woodford, assuming the trust's payout is maintained.

3. Do it yourself and create your own passive income from shares
Finally, you can always create your own passive income by acquiring a good spread of hand-picked dividend shares yourself!

True, this may take more nerve and a bit more skill than buying an FTSE 100 ETF or selecting a talented fund-manager to create your passive income for you. But the DIY passive-income rewards could be greater than those of the tracker or expert route. Indeed, here are five household-name members of the FTSE 100 that currently combine to deliver a potential 5.5% passive income a year:


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