If I put £20k into a FTSE 100 tracker fund, I’d get this as a second income

A lot of UK investors have money in Footsie trackers. Here, Ben McPoland explores how big a second income he could earn from one.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 tracker funds have grown in popularity in recent years. These simple investment funds passively mimic the performance of the Footsie while dishing out a second income in the form of dividends.

Alternatively, there are ‘accumulation’ versions with all dividends reinvested in the fund. This would mean going without an income today for a potentially bigger return in future.

Here, I’ll take a look at how much I could expect to receive in dividends from a £20k investment in a FTSE 100 tracker fund that distributes income.

Needles and haystacks

First, I can certainly see the appeal of this style of investing. I get broad exposure to multiple companies — in this case the largest 100 companies listed in the UK — through a single investment.

Moreover, because an index fund basically runs itself, they generally cost very little (certainly compared to active funds). High fees can significantly eat into long-term returns.

John Bogle, the pioneer of passive investing, captured the simplicity of index funds in this timeless quote: “Don’t look for the needle in the haystack. Just buy the haystack.”

The income

So, how much might the haystack pay me? Right now, the dividend yield on FTSE 100 stocks is 3.6%.

But that doesn’t mean I’d get that exact yield because dividends aren’t guaranteed. Companies can cut or cancel their shareholder payouts, while others raise them.

For example, luxury firm Burberry just scrapped its dividend as it deals with slumping sales. Vodafone is due to cut its in half, while Aviva (LSE: AV.) increased its payout by 7.7% last year.

Also, share prices move around a lot, which affects yields due to their inverse relationship. So there’s a fair bit going on.

As things stand though, the FTSE 100 yield is the aforementioned 3.6%, which is broadly what I’d expect from a tracker. So it means I’d be looking to receive about £720 a year in dividends from a £20k investment.

Note that I’ve ignored platform fees and fund costs here.

Forget the haystack

Is that any good? Well, it’s better than a wet crisp packet in the face, as my uncle is fond of saying. But I reckon I can do much better buying individual FTSE 100 stocks.

Returning to Aviva, that stock is yielding 6.5%. That’s not far off double the FTSE 100 average.

Better still, City analysts see the insurer increasing its payouts over the next couple of years. If those forecasts prove correct, then the yield rises to 7.2% in 2024 and 7.8% in 2025.

That would equate to payments of £1,440 and £1,560. A huge difference!

One risk I’d highlight with Aviva is its focus on markets in the UK and Ireland. That might limit growth moving forward, as they’re quite mature markets.

Yet the firm is in great shape financially. In March, its Solvency II capital ratio was a healthy 206%. And it’s buying back £300m of its shares, while its private health business is booming with NHS waiting lists near record highs.

Even so, I’d be reluctant to put £20k into one stock in case the dividend was cut. But there are 30+ FTSE 100 shares currently yielding over 3.6% (some much more). So I don’t really need to buy a tracker as a nice basket can be built by picking individual stocks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Aviva Plc. The Motley Fool UK has recommended Burberry Group Plc and Vodafone Group Public. 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.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »