How I’d invest in FTSE 100 shares to target a £9,386 yearly second income

UK shares offer excellent opportunities to earn a second income. Our writer outlines a plan to fulfil this ambition.

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I can think of dozens of ways to earn a second income. But my favourite method right now would be to own a basket of quality dividend shares.

There are several components in that sentence so let’s break it down. Dividend shares typically distribute payments to shareholders every quarter. This is a share of a company’s profits.

I’d consider some to be much higher quality than others though. So in my own portfolio, I prefer to stick with those that demonstrate quality characteristics. This can include profitability, consistent earnings and low levels of debt.

Next, I wouldn’t just want to own just one or two stocks. Companies can be hit with unexpected challenges at times. That’s why I prefer to diversify. A carefully selected basket of shares can spread risk so I’d avoid putting all my eggs in one basket.

Overall, that’s why I’d buy a basket of quality dividend shares rather than simply a couple of them.

Targeting a second income

To aim for almost £10,000 a year of additional income, I’d have to calculate what size of pot I’d need to begin with.

If I can earn an 8% yield on this dividend portfolio, I calculate that I’d need a pot worth £117,325 to reach my goal.

If I didn’t have this sum to start, I could still reach my goal but only if I postpone the date I start withdrawing funds.

I calculate that by investing £20,000 in a Stocks and Shares ISA every year for just five years, I’d expect to build a pot large enough to reach my targeted second income.

How I’d earn 8% a year

For this strategy, I’d focus on FTSE 100 shares. This large-cap index includes dozens of quality dividend shares, so there’s little need for me to look anywhere else.

But the average dividend yield in the Footsie is just 3.7%. That means I’d need to dig a little deeper to find my preferred shares.

What I’d buy today

For instance, I see that Phoenix Group offers a whopping 9.7% yield. Normally, I’d be wary of yields that look particularly large. They’re often unsustainable.

But in this case, I don’t believe this is the case. It earns more than enough in earnings to comfortably cover dividend payouts. I also like that it has grown its dividends consistently over the past seven years.

Next on my list is Rio Tinto. This global iron ore miner is a powerhouse in supplying material for steel. Presenting a return on capital employed of 25%, I’d consider it a quality share. This relatively mature business offers a dividend yield of 6.2%.

Building a basket

Note that as I’m targeting an 8% yield for my basket of shares, not all the individual stock picks need to meet this threshold.

Other shares that I’d buy today include Legal & General, Imperial Brands and Barratt Developments. By owning all five of these dividend shares, I’d expect to earn an average yield of 8%.

Bear in mind that I’d need to keep an eye on my shares as much can change over the years. I also have to accept that I might not achieve 8% and I could even lose money, That said, I reckon this is a solid selection to target my second income plans.

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 Imperial Brands Plc. 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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