When targeting a £1,000 yearly second income, then FTSE 100 shares might be the greatest place to put my money.
There are many huge UK companies that offer, I think, the best chance for a small investor to earn a passive income.
What’s more, now might be a once-in-10-years chance to get started while conditions are good.
Why Footsie shares?
Let’s start with the reasons why FTSE 100 shares are a fantastic way for me to earn a second income right now.
- £79bn paid out to FTSE 100 shareholders in dividends last year
- 95% of FTSE 100 companies pay a dividend
- 7% dip from all-time high has pushed up dividends further
- The FTSE 100 average dividend (3.7%) over double the US S&P 500 (1.66%)
- The FTSE 100 price-to-earnings average is 13 (S&P 500 average of 29)
With all this good news, what’s the catch?
Well, I’d say there are two commonly cited reasons that UK and FTSE 100 shares are cheap right now. One is the uncertainty since Brexit, and two is the UK’s low productivity growth since 2007.
Personally, I think those claims are overstated, particularly when I consider that 70% of Footsie revenues are made abroad.
So I feel there’s currently a real opportunity to buy into ’unloved’ FTSE 100 companies at cheap prices.
What could I buy?
So what kind of FTSE 100 companies would I look at for my second income?
For one, Vodafone looks like a great buy right now. A recent 26% fall meant shares cost just 92p each. The company makes billions operating mobile networks in Europe, Africa and Asia and offers a forward dividend yield of nearly 9%.
Another great FTSE 100 stock is mining giant Glencore. The firm made $17bn in earnings last year and paid out $7.1bn of it to shareholders to give an over 8% yield.
A third example is National Grid. The gas and electricity supplier has extremely stable incomes from the use of its infrastructure across the UK. The firm has a strong dividend history and paid out around 5% in the last year.
All of those stocks have company-specific risks too, so their returns aren’t guaranteed.
How to hit £1,000
To make a start towards a £1,000 second income, I can’t only focus on dividends.
And dividend payments I receive are only half the equation. I have to include share price gains too in order to see the real return on my investment.
Over the last 40 years, the FTSE 100 has delivered average 8% returns to investors.
If I use that figure, then I’d need £12,500 in shares to give me an average £1,000 a year.
Double my target
I could go one better by reinvesting those returns. The second year, if I got the average £1,000, then my now-£13,500 total would give me £1,080.
After 10 years of doing this, the initial stake would have increased to £26,987 and the second income would be £1,999.
Of course, investing in companies is risky and there’s no certainty I would make this much. Also, stocks have up and down years and rarely offer a consistent return.
Still, I’d say investing in quality FTSE 100 shares is my best chance to build a lifelong second income.
