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Why I think now is the perfect time to build a second income stream from the FTSE 100

The outlook for savers doesn’t seem to be getting any easier. Interest rates are still close to historic lows, and uncertainty surrounding Brexit means there’s no guarantee they will rise at a brisk pace in future years. At the same time, bond yields are relatively low, while taxes on buy-to-lets are making the sector increasingly unappealing.

As a result, FTSE 100 dividend shares could prove to be a solution to investors who are seeking to obtain an income from their capital. And with the index having fallen in recent months, dividend yields have moved higher. It’s now possible to build a portfolio yielding in excess of 5% that offers diversity and dividend growth potential over the long run.

High yields

With the FTSE 100 having a dividend yield of around 4.5% at the present time, there are a number of stocks that offer income returns above 5%. This is relatively unusual, since the index has historically only offered a yield above 4% for brief periods. Those periods have usually coincided with times of significant share price volatility, with falling share prices causing dividend yields to rise significantly.

Today, though, prospects for the index and for the world economy continue to be relatively positive. Certainly, the index has experienced a correction in recent months. It’s down by around 13% since May 2018, for example. But it’s still technically in a bull market which has lasted for almost a decade. And with the world economy continuing to offer strong growth prospects, despite risks such as a global trade war and rising US interest rates, the prospects for dividend growth among FTSE 100 shares seems to be high.

Diversification

Diversifying among a range of stocks is crucial for investors seeking to build a second income stream from FTSE 100 companies. With various industries facing specific threats, it’s important to spread the risk throughout a number of stocks which face different risks and challenges. Likewise, buying shares with exposure to a variety of regions and markets could prove to be a shrewd move, given the uncertainty posed by Brexit.

With a variety of shares in the FTSE 100 offering dividend yields that are higher than the index, now could be a perfect time to build a diversified portfolio of income stocks. For example, it’s possible to buy shares in the oil and gas, utilities, consumer goods and house-building sectors, which together could post income returns that are far more appealing than assets such as cash, bonds and property.

Certainly, there’s a risk of further share price falls in the near term. But for investors who have a long-term outlook and diversify, history shows that recovery prospects are generally bright. As such, building a second income stream from the FTSE 100 may be a shrewd move at present.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.