If I put £20,000 into the FTSE 100, how much passive income would I get?

The FTSE 100 is known as a passive income paradise due to the generous dividends paid out by mature blue-chip companies. These include Rio Tinto, BP, Lloyds, and Imperial Brands.

Meanwhile, the annual Stocks and Shares ISA contribution limit is £20,000. This means I can invest that much and not have to worry about tax. Well, as things stand, at least (I’m writing before the budget).

Putting those two together then, how much could I receive from a £20k investment in an exchange-traded fund (ETF) that tracks the FTSE 100? Let’s find out.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The amount

According to the London Stock Exchange, the FTSE 100’s dividend yield is 3.64%. So I’d expect to get around £728 a year in dividends from such an investment.

No payout is guaranteed, of course. And the yield can fluctuate due to share price movements, dividend cuts, increases, and special dividends. But that’s what yield I’d expect.

Is that enticing? It might not sound it when savings accounts are still paying very respectable rates. And I could lose some of my invested capital if the Footsie tanked.

Looking ahead though, interest rates are seemingly heading lower, which means that yield (and stocks in general) should start to look a more attractive prospect.

What could it lead to?

Either way, I could reinvest my dividends and still expect compounding to work its magic over time.

For example, let’s assume my FTSE 100 ETF returned 8% a year through a combination of dividends and share price increases. And that I reinvested those dividends (or invested in an accumulation ETF that automatically did it for me). Here’s how that would play out over time.

In this scenario, I’d end up with over £200k after 30 years — without investing another penny!

A much higher yield

While I can see the appeal of passive ETF investing, my own approach is to pick individual stocks. And one that I’ve bought on multiple occasions this year is HSBC (LSE: HSBA).

The share price is currently at a six-year high after the bank reported better-than-expected Q3 earnings. Pre-tax profit jumped 10% year on year to $8.5bn, breezing past analysts’ expectations for $7.6bn. That was on quarterly revenue of $17bn, which was 5% higher and also more than anticipated.

Additionally, the bank announced it was buying back another $3bn worth of shares, adding to the $3bn buyback it just carried out. As for the yield, it stands at 6.7%, which is substantially above the FTSE 100 average.

Mind you, HSBC doesn’t come without risk. The bank is to formally split its geographic footprint between East and West, and we don’t know how this major revamp will play out. Meanwhile, restructuring and cost-cutting might not be enough to sustain profits as interest rates fall.

However, new CEO Georges Elhedery reckons grouping its Middle East and China businesses together will help it capture big growth opportunities. He said: “We see the corridor between the Middle East and Asia as one of the fast growing business corridors — be it trade corridors or investment corridors — on the planet.”

To my mind, HSBC offers a good blend of high-yield dividends and long-term growth potential. With the stock still cheap on a price-to-earnings ratio of eight, I prefer it over a Footsie tracker.