UK shares are a brilliant source of second income. Better still, once an investor’s bought a stock, they don’t need to lift a finger to earn it.
Many investors fixate on the growth opportunities available on the US S&P 500, but there isn’t much passive income to be had there. The average yield’s just 1.1%. By contrast, FTSE 100 shares now yield more than 3.5% on average.
UK companies paid a staggering £92.1bn in dividends to shareholders in 2024, up 2.3% on a headline basis, according to Computershare’s latest UK Dividend Monitor.
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The FTSE is a brilliant source of dividends
This is a brilliant opportunity to tap into. While share prices and dividend payments aren’t guaranteed, over the longer run a diversified spread of them should compound and grow very nicely.
The most common strategy is to reinvest every dividend while in the wealth-building stage, then draw them as income in retirement. Here’s how an investor could target a generous passive income of £3,000 a month, or £36,000 a year, by investing in UK dividend shares.
How much they need to invest to achieve this partly depends on the average yield across their portfolio. So with a 5% yield, they’d need £720,000 to hit that target income. I reckon that it’s possible to aim for an average portfolio yield of 7% while still focusing on high-quality companies. That cuts that target to around £514,000.
Let’s say our investor was starting from scratch. If they invested £1,200 a month and got an average total return of 7%, they’d have around £523,000 after 18 years. That’s quite a large monthly sum to invest. If they cut it to £500 a month, they’d build a similar sum but it would take around 28 years.
Currently, I can see eight FTSE 100 stocks with yields of 7%, or more. One of them pays income bang on 7% – Land Securities Group (LSE: LAND), or Landsec as it calls itself.
Landsec has a high yield but also carries risk
The company’s what’s known as a real estate investment trust (REIT). It owns a spread of high-quality commercial properties, ranging from office blocks to shopping centres, which should generate a steady, rising rental income from tenants.
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As Landsec increase rents every year, it can pay more dividends too. There’s also scope for capital appreciation as property prices rise.
Like every stock, this one has risks. Commercial real estate’s cyclical. An economic downturn can hit occupancy rates and rental income, pressuring dividends.
Office block revenues are threatened by the work-from-home trend, while retail centre footfall can be volatile. Today’s higher interest rates are making the group’s debts costlier to service too. It has net debt of around £3.5bn.
The share price has fallen 15% over the past year, and 42% over five years. Our investor should only consider buying once they’ve built a diversified portfolio of at least a dozen stocks, starting with lower risk profiles.
By doing that, they could build a generous second income that could last for life, and increase every year too. There are risks, but also serious rewards.
