Image source: Getty Images
A second income stream is always a good thing to have. Especially if it’s a passive income, when you don’t actually have to work for it.
Sounds too good to be true? Ordinary people can achieve it, for example, by investing in a portfolio of FTSE 100 shares.
UK blue-chip stocks don’t just offer growth when their share prices rise, most of them pay regular dividends to shareholders as well.
FTSE 100 dividend dream
These dividends can be taken as income right away, although most people reinvest them back into their portfolio while of working age, to buy more shares. That way they benefit both from compounding income and growth. When they retire, they can start drawing those dividends to top up their state pension and other income sources.
Let’s get ambitious here. How much would you need in a tax-efficient Self-Invested Personal Pension (SIPP) to generate a pretty meaty retirement income of £50,000 a year?
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.
That depends on the amount of income the SIPP yields. The average yield on the FTSE 100 is 3.5% but it’s possible to lift that to around 6% with a careful selection of higher-income stocks. With a 6% yield, our investor would need £833,333 to generate that £50k income target. So how difficult is that to build?
High-yield target
Let’s take someone who’s 35 and already has £35,000 in their SIPP. If they invested £450 every month and generated an average total return of 7% a year, their pot would be worth around £812,223 by age 65.
If they left it untouched for a couple more years, to age 67, that would grow to £941,875. Of course, these are only estimates, we have no idea what will happen in real life. Our investor could get more, they could get less. But my figures show what consistent investing can potentially achieve.
I’d suggest building a balanced portfolio of dividend shares, and one that I see as worth considering is FTSE 100 commodity giant Rio Tinto (LSE: RIO).
At first glance, it doesn’t look attractive. The Rio Tinto share price has slipped 4% over the past year and sits near levels from five years ago.
It’s been a tough time for the commodity sector. When China was booming, it gobbled up around 60% of global natural resources production. When growth slowed and concerns about China’s property sector and shadow-banking emerged, demand flagged. Tensions with the US haven’t helped.
Attractive P/E ratio
Yet as a result, shares look attractively valued with a price-to-earnings ratio of 11.6, well below the FTSE 100 average of 15. The trailing dividend yield is a hefty 6.73% which beats cash hands down. Dividends aren’t guaranteed though.
Analysts forecast a slight dip to about 5.46% across 2025, then a modest increase to 5.6% in 2026. A healthier global economy and clarity on China might help to revive Rio, although that could still be a few years off. I’d balance this one with other income stocks with more immediate potential.
By investing £450 a month (or more) in a spread of shares I reckon it’s possible to hit that ambitious £50,000 income target. This is a marathon not a sprint, but the prize is a big one.
