I’d spend £5k on these FTSE 100 shares to target a £12,708 second income

Several leading growth and dividend shares can be found in the FTSE 100. Our writer explores one that he thinks offers the best of both worlds.

| More on:
Young mixed-race woman jumping for joy in a park with confetti falling around her

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 shares can be an excellent source of additional income. That’s because many pay a dividend yield. These regular payments can add up to a tidy sum over time.

Right now, the average FTSE 100 yield is 3.7%. With interest rates much higher than they have been over the past decade, this might not sound appealing.

But remember that dividends aren’t the only way company’s return value to shareholders.

Typically, a listed business can do several things with its profits. As mentioned, it can distribute dividends in the form of cash to investors. Alternatively, it reinvests profits to grow the business. Or it can buy back some shares to reduce the supply in circulation.

Many newb income investors might focus on dividends. But the latter two actions are equally as important, in my opinion. Especially when a second income isn’t expected immediately.

Eye on the future

That brings me onto my next point. To earn a £12,708 second income, I calculate that I’d need a share portfolio worth around £160,000. Assuming an annual 10% return, if I save £5,000 a year, this could take around 15 years to achieve.

As a long-term investor that avoids unnecessarily large risks, this isn’t a problem for me.

That said, I could quicken the timeline by investing more money every year, or targeting a larger-than-average stock market return.

Which FTSE 100 shares?

Instead of focusing on high-dividend shares, I’d consider high-quality businesses with growth potential. Ultimately, I want to grow my pot over several years.

One of my top picks is RELX (LSE:REL). It might not be a household name, but it’s a global provider of analytical tools for companies and other business customers.

RELX is an example of a business that completes the hat-trick. It offers a 1.9% dividend yield and is expecting to buy back £1bn of shares this year. Finally, it’s reinvesting profits into leveraging artificial intelligence (AI) to drive future growth.

The company believes this will be an important driver for the business for many years to come. And given the deep and powerful data sets it owns, I’m inclined to agree.

A high-quality British business

I would say that a high-quality share typically offers reliable earnings, a large profit margin, and a strong cash flow. RELX ticks all of these boxes, in my opinion.

Its 28% return on capital employed and 29% profit margin are impressive. That could be due to all the recurring sales it benefits from. Repeat purchases tend to be more reliable and valuable than one-off buys.

For the near term, one potential risk is valuation. Its share price has pushed higher by 35% over the past year. A decent showing, but one that’s dwarfed by the triple-digit gains experienced by other FTSE 100 giants such as Rolls-Royce.

Still, with a forward price-to-earnings ratio of 27, it’s not the cheapest stock around.

Over the past decade, RELX shares have produced a solid return of 15% a year. Future returns aren’t guaranteed. But looking ahead, the long-term picture looks promising. That’s why I’ll be putting them straight onto my buy list.

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 RELX and Rolls-Royce 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.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »