The FTSE 100 index we have in the UK offers some of the best dividend-paying shares I can find the world over. By my count, 22 of those companies currently offer over 5% annual returns and 10 of them offer more than 7% for the year.
If I took advantage of these high payouts, I think it might be surprisingly easy to reach a £500 a month in a second income.
Three options
A quick calculation tells me that I could reach that £500 a month – or £6,000 a year – starting with as little as £75,000. And I see three paths I could take to get there.
First, I could invest solely in dividend shares. These would be in companies that offer safe, regular payouts to shareholders, such as BT with a 5.34% current yield, Abrdn with 7.19%, or Vodafone with 8.86%. As dividends do change year by year, I’ll use a 5% average return for this calculation.
Second, I could buy shares in a FTSE 100 tracker, which would give me the average of all the companies on it, about 8% a year based on historical data. This is a higher amount, but the returns come from share growth rather than dividends which can be risky and volatile.
Lastly, I could invest in a mix of dividend and growth shares, which would involve the careful choice of strong companies. Studies have shown the average return of a Stocks and Shares ISA is 5.7%, which seems like a reasonable return to use for my calculation.
| Dividend stocks | FTSE 100 tracker | Dividend and growth stocks | |
| Return | 5% | 8% | 5.7% |
| Total needed for £500 a month | £120,000 | £75,000 | £105,263 |
While these numbers look pretty, they are based on historical performance and current dividends. Future returns from investing may not be as high, and that makes this next step important.
Useful blueprint
There’s a famous military saying that ‘no battle plan survives contact with the enemy’. I think this also rings true with investing, where unexpected things happen frequently.
In my time owning stocks, I’ve hit unpredictable roadblocks that have affected how much I can save or invest. A job change here or an unexpected cost there, for example. These things make reaching a goal like £75,000 or anything else hard to plan for.
But I find a blueprint, like the one above, to earn £500 a month from FTSE 100 shares is still useful. It’s a little like knowing about the 2,000 UK citizens who have become millionaires in their Stocks and Shares ISA — it shows me what’s possible and gives me inspiration to keep saving and investing.
And just because I have a plan, it doesn’t mean I have to stick to it religiously. In practice, thinking things through has worked for me so far and I’ve seen excellent growth in my investments.
All this said, it’s still some time before I aim to withdraw an income from them just yet. But I hope that when I do, I’ll be able to pull £500 or perhaps more from my FTSE 100 shares.
