Image source: Getty Images
Looking to make a strong second income from FTSE 100 stocks? You’ll have noticed that things are tougher now than they’ve been for some years.
The Footsie is on a multi-year bull run that’s driven dividend yields lower than what we’ve come to expect. Today the broader index’s forward yield sits at 3.1%. That’s at the bottom end of the long-term average of 3% to 4%.
To put that into context, a £20,000 ISA investment in a FTSE 100 tracker fund today will provide just £620 in dividends this year. That’s a pretty weak return for anyone seeking a second income, at least in my view.
I think I’ve found the solution…
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.
Targeting larger dividends
Those FTSE 100 trackers funds are popular with new investors. They provide instant diversification, keep costs low, and provide exposure to some of the world’s best and biggest companies.
The problem is these exchange-traded funds (ETFs) also include low-paying dividend stocks, weighing on the overall yield. The reason is simple — many blue-chip companies prioritise investing their surplus cash in their operations over distributing it to shareholders.
This is why can be better for investors to build their own diversified passive income portfolio targeting only high-yield stocks. But what could a portfolio like this look like? I think I’ve found an answer…
7 of the best?
The first thing to notice is my selection contains far fewer shares than an index-tracking ETF. This also means less diversification, which comes with added risk.
That’s not to say that the income portfolio shown above isn’t diversified, however. The companies within it operate across various industries, providing strength across the economic cycle (from miners and banks, to tobacco manufacturers and real estate investment trusts (REITs)).
Combined, these shares also provide exposure to all four corners of the world. So if a particular region suffer turbulence, this won’t necessarily weigh on the portfolio’s overall returns.
The average dividend yield of all these seven stocks is 6.2%. This is double the broader FTSE 100 average of 3.1% we discussed earlier.
And if they pay the dividends City analysts are forecasting, they’ll turn a £20,000 Stocks and Shares ISA investment into a £1,240 passive income this year.
This FTSE 100 stock’s on my radar…
Tritax Big Box (LSE:BBOX) is actually a dividend stock I’m actively considering for my own portfolio. Prior to the Covid-19 pandemic, it had raised annual payouts every year since it listed on London’s stock market in 2014.
The reason? The rents it receives provide steady income flows it can distribute to shareholders.
Though rising interest rates pose a risk, I’m optimistic Tritax’s dividends will keep rising too, barring another once-in-a-generation crisis. This is because:
- At least 90% of annual rental earnings must be paid in dividends under REIT rules.
- A significant proportion of tenant contracts are inflation linked.
- Growth in the logistics and data centre markets is accelerating.
- The firm’s enjoys a strong balance sheet (its loan-to-value (LTV) is a manageable 32.9%).
But if you don’t fancy taking a bite of Tritax Big Box, that’s fine. There are many top FTSE 100 stocks to consider if you’re looking to build your own passive income portfolio today, including the one discussed below.
What income stock do we like better than Tritax Big Box REIT Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Royston Wild owns shares in Legal & General Group.
This story originally appeared on Motley Fool
