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.
The post I’d spend £5k on these FTSE 100 shares to target a £12,708 second income appeared first on The Motley Fool UK.
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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.
