Turning £20,000 cash into a £1,500 annual second income requires a return of 7.5% a year. And there are a number of FTSE 100 stocks that can make this happen almost immediately.
These are shares in companies that are big, well-established, and have been around for a long time. And in some cases, they’re still growing even today.
Dividend stocks
One of the nice things about the FTSE 100 is there are a number of stocks with high dividend yields. So investors looking for a 7.5% yield don’t have to risk it all on just one company.
There are life insurance firms, tobacco businesses, housebuilders, and mining companies. These are from different industries and have operations all around the world.
With a bit of weighting, it’s possible to build a reasonably well-diversified portfolio of FTSE 100 stocks that offers a 7.5% dividend yield. Examples are:
| Stock | Portfolio Weight | Dividend yield | Weighted yield |
|---|---|---|---|
| Legal & General | 30% | 8.49% | 2.55% |
| Taylor Wimpey | 27% | 8.4% | 2.27% |
| British American Tobacco | 25% | 6.48% | 1.62% |
| BP | 18% | 6.07% | 1.09% |
| Average | 7.53% |
This is based on the most recent shareholder distributions. But dividends are never guaranteed and companies can – if they want to – decide to reduce, suspend, or cancel returns to investors.
Dividend risks
One example is Taylor Wimpey (LSE:TW) — the stock I think investors interested in FTSE 100 housebuilders should be looking at. The company’s profits tend to fluctuate quite a bit as changes in interest rates affect demand for mortgages – and therefore, houses.
This shows up in the company’s sales and profits. Since 2022, both revenues and earnings per share have fallen and it’s no accident this has coincided with a period of higher interest rates.
Unusually however, that’s not the main thing for Taylor Wimpey shareholders to pay attention to. The firm’s dividend policy’s based on its net assets, rather than the cash it generates.
That makes it a more resilient income stock than some other UK builders. But it doesn’t protect the dividend indefinitely – and May’s distribution was lower than the previous year.
Long-term investing
This is why investors – even ones focused primarily on passive income – need to consider a company’s long-term prospects. And there are reasons to be optimistic about Taylor Wimpey.
Most obviously, it operates in a market where demand’s set to be strong for a long time. The UK has a big shortage of housing and this isn’t going to change any time soon.
The dividend might be higher or lower in any given year, but I expect the fluctuations to be less dramatic than some of its competitors and that makes it worth considering.
High dividend yields are, as a rule, a sign investors are concerned about the company’s long-term prospects. And while I think this can be justified, Taylor Wimpey looks unusually resilient to me.
Opportunities
In general, the FTSE 100’s made up of businesses that have been around for a long time. And that means they are – by definition – relatively successful.
There are always things that can go wrong and some stocks are clearly riskier than others. But the UK stock market’s where I think investors trying to generate a second income should look.
