Collecting a second income from dividend shares seems like a great idea to me. But how much would I need to invest to generate a useful amount of income — say, £250 per week?
Here, I’ll look at two options and provide an example portfolio of dividend shares I’d consider buying today.
Before I start, I should point out that dividend shares won’t provide a weekly income. Most dividends are paid twice a year, so I’d have to manage these payouts myself to provide a weekly income.
Quick, simple and easy
The easiest safest option, in my view, would be for me to put all of my capital into a FTSE 100 index tracker fund.
Investing in a tracker fund would mean that I’d have limited risk of being affected by problems at a single company. However, I would have quite heavy exposure to sectors such as mining and banking, which have a big weighting in the lead index.
The average forecast dividend yield of FTSE 100 stocks is about 3.9% at the moment. To generate an income of £250 per week — equivalent to £13,000 per year — I’d need about £335,000.
A higher yield from dividend shares
A 3.9% yield doesn’t seem too bad to me. But I’m pretty sure I could do much better by investing directly in a smaller number of dividend shares.
This approach would leave me with more concentrated exposure to fewer companies, which could be a risk. On the other hand, picking stocks means I’d be able to avoid companies I don’t want to own. That would leave me free to focus on the stocks I think offer the best dividends.
I’d plan to build portfolio of 20 stocks. In my experience, this number provides a good balance between diversification and focus. It’s also low enough to be manageable — I’d need to keep track of these companies’ performances myself.
Which FTSE 100 stocks would I buy?
I’ve built a quick example portfolio of FTSE 100 dividend shares I’m familiar with and would be happy to buy today.
These shares have an average forecast dividend yield of 5.5%. This payout is expected to be covered twice by forecast earnings, on average. I’m comfortable with that, as I think it should provide a decent margin of safety.
| Company | Forecast dividend yield |
| Barratt Developments | 9.3% |
| Phoenix Group | 8.4% |
| Vodafone | 7.3% |
| British American Tobacco | 7.0% |
| NatWest Group | 6.7% |
| Landsec | 6.5% |
| DS Smith | 6.3% |
| Admiral | 6.3% |
| BT Group | 5.8% |
| National Grid | 5.3% |
| WPP | 5.1% |
| Schroders | 4.8% |
| Tesco | 4.8% |
| BP | 4.7% |
| DCC | 4.2% |
| CRH | 4.0% |
| Unilever | 3.7% |
| BAE Systems | 3.4% |
| Coca-Cola HBC | 3.4% |
| AstraZeneca | 2.7% |
| Average yield | 5.5% |
I’d want to do more in-depth research on these companies before hitting the ‘buy’ button. But in my view, these are all good quality names with solid long-term prospects.
If I built a portfolio from these 20 stocks, I estimate I’d need £236,363. That’s around £97,000 less than than I’d need if I put all my capital into a FTSE 100 tracker.
Of course, dividends are never guaranteed and aren’t a replacement for cash savings. But I’d definitely be happy to take this approach to generating a regular income from dividend shares.
