I love the idea of earning a second income on top of my main job, but can’t spend too much time on it. Luckily, I’ve found a way of generating it with precious little effort, by investing in dividend-paying FTSE 100 shares.
There’s some effort required. It takes a bit of time to set up a Stocks and Shares ISA, but after that I can invest up to £20,000 a year free of tax, and trading only takes seconds.
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If I wanted to do the absolute minimum, I’d simply shove my money into a low-cost exchange traded fund (ETF) such as the iShares Core FTSE 100 UCITS ETF. Buying individual stocks is more fun, though, and picking them doesn’t feel like working at all.
Fun with FTSE 100 income
Once I’ve bought them, the dividends and any share price growth roll into my account, while I get on with other things.
If I had £10,000 at my disposal today and didn’t hold any shares, I’d spread my risk. I’d do this by splitting the cash evenly between five blue-chips with a solid track record of paying dividends and offering share price growth too.
One FTSE 100 stock I’d love to buy right now is insurer Aviva (LSE: AV). It’s an established UK company, rather than a shoot-the-lights-out growth stock. Yet the shares are still up 25.32% in the past 12 months.
The real attraction is the dividend. The stock has a trailing dividend yield of 6.92%, which lifts the total 12-month return to 32.24%. Yet Aviva looks good value trading at just 12.68 times earnings.
Stock performance is cyclical. Good years can follow bad, and vice versa. The Aviva share price was stagnating before the recent surge. It could stagnate again. Given that I’m investing over a 25-year term, I’m happy to take the ups with the downs.
Income opportunity
Things are going nicely today. First-quarter general insurance premiums jumped 16% year on year to £2.7bn, while protection and health sales rose 5% as more Britons took out private medical insurance to bypass NHS waiting lists. Its wealth arm is on the up, with net flows up 15% to £2.7bn.
Private annuity sales have climbed due to today’s higher interest rates, but that could reverse once central bankers start cutting.
While I wouldn’t put all my £10k into Aviva, let’s use that 6.92% yield as a benchmark. It would pay me a passive income of £692 in year one. If I reinvested all my dividends, I’d have £53,269 after 25 years. Any share price growth is on top of that, so I could end up with a lot more. On the other hand, dividends could be cut. The shares could fall. That’s investing for you.
Let’s say I also invested £500 a month over that 25-year period. In that case I’d end up with £454,394, assuming the same 6.92% return. When I’d start drawing my dividends I’d get a second income of £31,444 a year. Which works out as £2,620 a month.
Obviously, returns aren’t guaranteed and all this takes time. But it takes surprisingly little effort for the enormous income I can potentially get in return.
