The FTSE 100 index is home to many mature and established companies. It’s made up of the largest 100 shares listed in the UK.
I’m looking for the best way to earn a second income from shares and I reckon the Footsie is a great place to start.
That’s because this large-cap index includes many dividend shares. The average FTSE 100 dividend yield is currently 3.8%. That doesn’t sound too bad, but I’d note that several shares pay above 6% a year. And that’s where my focus will be.
Diversified FTSE 100 shares
I prefer to spread my stock holdings across several industries. That way, if a crisis hits the retail sector, for example, my energy shares will hopefully be unaffected.
Similarly, I wouldn’t just buy one or two shares and invest all my money in them. I prefer to diversify and spread my funds across multiple FTSE 100 shares. That way, I won’t be putting all my eggs in one basket.
Were I investing £250 a month at the moment, I’d pick five of my favourite Footsie shares and put £50 into each.
Regular investments
I could save up these smaller amounts and buy £3,000 worth of shares at the end of the year. However, making regular purchases every month could give me two main advantages.
First, share prices move up and down in the short term for a variety of reasons. An automated monthly purchase programme would allow me to buy at an average price across the year instead of the price it happens to be at the end of the year.
Second, as many of my stocks are dividend shares, by waiting until the end of the year, I would miss out on a year’s worth of income. With some FTSE 100 shares currently offering 16% in dividends, that’s a chunk of change that I’d rather not miss out on.
Best dividend shares
I prefer shares that have a long track record of paying dividends. It’s a good thing then that the Footsie has considerable history. I can think of several shares that have been paying regular income to shareholders for decades.
I’m also keen on owning shares that are well covered by earnings. Affordable dividends are likely to be more sustainable.
Right now, FTSE shares that meet my criteria include housebuilder Persimmon that offers a whopping 16% dividend yield, and iron-ore mining giant Rio Tinto, which offers 10%.
Bear in mind that these are considerably above-average figures. There’s a chance that these dividends may be lowered. Both of these shares are cyclical so they tend to move in line with the economy.
And with signs of a recession, there are risks on the horizon. That said, both are high-quality businesses that should thrive over many years so I’d still be happy to own them.
I’d also buy Phoenix Group, Imperial Brands and Legal & General right now. On average, these five shares offer a 10% yield.
Stock market investing is best done over the long term, in my opinion. So if I invest £250 a month for 20 years and reinvest all of my dividends, I calculate that I could build a £170,000 pot. That could eventually generate around £17,000 in dividend income.