I’d buy these FTSE 100 shares to earn a second income

With dozens of dividend-paying stocks in the FTSE 100, our writer considers which shares he’d buy for the best passive income.

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The large-cap FTSE 100 index can be an excellent way to earn a passive income. That’s because it’s home to several high-quality dividend shares.

On average, the Footsie offers a dividend yield of 3.6%. That doesn’t strike me as particularly lucrative right now. Especially with the Bank of England base rate at 4%.

That said, within the FTSE 100 there are around a dozen dividend shares that offer 6% or more. That’s where my focus would be when looking for income shares.

Top FTSE 100 share

If I had spare cash, I’d buy Phoenix Group Holdings (LSE:PHNX). It’s a UK-based savings and retirement business. Currently it offers a juicy 8% dividend yield. That’s among one of the highest yields in the lead index right now.

With a £5,000 investment, it equates to around £400 in dividends a year.

The company offers a stable business model with a solid balance sheet. It grows both organically and by buying smaller firms.

2022 was an encouraging year for this insurance-based business. And the future looks bright too. Phoenix set a new target to generate an additional £1.5bn of cash generation by 2025. Much of this should support future dividend growth.

Bear in mind that dividends can be cut at any time though. They’re reliant on earnings and any shocks to the business can put the dividend at risk.

When looking for the best income shares, I like those that show a long dividend history. Phoenix is no exception. With 13 years of back-to-back dividend payments, it gives me great comfort in its priorities.

Special dividends

Income investors often overlook the special dividends that some companies occasionally distribute to shareholders. These non-regular payments are typically paid from excess cash generated by the business.

For instance, value retailer B&M European Value Retail (LSE:BME) has a policy of giving out a portion of excess cashflow to shareholders. It currently offers a yield of 3.4%. Despite that being less than the FTSE 100 average, it becomes much more appealing when factoring in its special dividends.

Including these additional payments, B&M’s yield jumps to 7.5%. A word of warning though. Investors relying on these special dividends could be left disappointed if they’re not distributed one year. They’re certainly not guaranteed.

That’s why I prefer to own a diversified selection of investments in my Stocks and Shares ISA. It avoids putting all my eggs in one basket.

Quality, value and income

If I had spare cash to invest today, I’d still buy B&M though. But it wouldn’t just be for its dividend income. I like this business for its disciplined cost control, flexible product sourcing, and focus on value for money.

As the cost-of-living crisis continues, I reckon B&M’s value offerings should remain popular.

I’d describe it as a quality share too. That’s because it offers a 19% return on capital employed. This measure of business quality is frequently mentioned by veteran investor Terry Smith. It shows how efficiently a company turns its capital into profits.

Quality, value and income could prove to be a winning combination, in my opinion.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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