The FTSE 100 and FTSE 250 can be great places to source a second income. These indexes contain stacks of passive income shares that have illustrious histories of delivering a large and growing dividend.
If I had £10,000 spare to invest today, and was looking to achieve a weekly dividend income of £100, I’d spend the money on a handful of blue-chip shares from these indexes.
Big benefits
Hundreds of companies on the London stock market are tipped by analysts to pay dividends. So why could shares from the Footsie and FTSE 250 be the best way for me to target a passive income?
Here’s a brief list:
- Established businesses. These indexes are packed with large, stable companies that have long records of profitability.
- Strong cash flows. The substantial and consistent cash flows these firms generate support regular dividend payments.
- High dividend yield. Yields on large- and mid-cap shares tend to be large compared with smaller stocks.
- Market leaders. Dominant industry positions can provide stable revenues and earnings, even during downturns.
- Diverse revenues. Exposure to different regions, sectors, and product categories help companies remain resilient when problems occur.
Which stocks would I buy?
With this in mind, which four companies would I buy to hit my weekly dividend target?
Financial services providers Aviva and M&G would be near the top of my list. These are businesses with significant reputational strength — a quality worth its weight in gold when looking after peoples’ money. They also have leading positions in growing wealth and retirement markets. Revenues could be at risk if consumers continue to feel the pinch, however.
I’d also look to add HSBC Holdings to my portfolio. Like those other FTSE 100 shares, it has a robust balance sheet to help it pay large dividends even if profits dip. In the near term, its earnings could suffer as the key Chinese economy struggles. But the long-term outlook here is strong, as rising wealth and population levels in Asia steadily boost demand for banking products.
Finally, I’d buy renewable energy stock Octopus Renewables Infrastructure Trust. Earnings at the FTSE 250 business would be vulnerable in the event of interest rate rises. Yet I’d still expect earnings here to rise strongly over the long term as demand for green energy heats up.
A £100 weekly income
The average dividend yield for these shares is 8.8%. So if payout forecasts prove accurate, £10,000 invested equally across these companies would provide me with dividends of £880 this year.
That equates to around £17 per week passive income, short of my target of £100.
But I realise that the key to successful investing is to take a long-term view. To quote billionaire stocks guru Warren Buffett: “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
With that £10k investment in those five shares and dividends reinvested, I could achieve that £100 per week goal in just over 21 years, using the above calculation.
But in reality, I could achieve this more quickly if these companies grow dividends over time, as I expect they will.
While dividends are never guaranteed, our example shows how — over the long term — buying UK shares can be a great way to make a second income.
This post was originally published on Motley Fool
