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.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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.
The post £10k stashed away? I’d use it to kickstart a £2,620 monthly second income appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
2 cheap FTSE 100 dividend stocks I’d buy after last week’s washout!
2 reasons why I’m eyeing the Aviva share price
My 2 favourite FTSE 100 bargain stocks this August!
2 grade A FTSE 100 stocks I reckon are screaming buys
Here’s where I think the Aviva share price might end 2024
Harvey Jones 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.
