Who wouldn’t fancy a second income? Especially one you don’t have to lift a finger to generate. It’s possible to get just that, by investing in FTSE 100 dividend shares. Two or four times a year they make regular cash payments to shareholders, who can do what they want with these payouts.
Typically, investors reinvest their dividends to buy more shares while of working age, then draw them as a passive retirement income after they retire.
If an investor had £2,000 to invest this March, and doesn’t need the money for at least five years (and ideally several decades), it should work much harder in shares than cash.
Should you invest £1,000 in Barratt Developments right now?
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FTSE 100 stocks build wealth slowly but steadily
Money invested in dividend stocks should grow over time and compound with every reinvested payout. However, investors must also anticipate plenty of volatility on the way. Share prices can fall as well as rise. Dividends can be cut at any time. The real benefits only shine through over time. Patience is required.
If an investor could generate an average total average return of 9% a year from dividends and share price growth, that initial £2,000 could potentially grow into £26,534 over 30 years. That’s a pretty handsome return, given the tiny initial stake. Investing £2k every year would deliver £297,150 after 30 years.
Somebody who invested £2k every month would end up with almost £3.6m! Not a bad target to aim for.
Let’s return to that one-off £2k. If it does grow to £26,534 and then generates a dividend yield of 6% a year, that would produce a passive income of £1,592 a year. Obviously, that’s nowhere near enough to live on in retirement, but it’s not bad from just one monthly investment.
One FTSE 100 stock that could potentially play a key role in this dividend growth strategy is British American Tobacco (LSE: BATS). It currently offers an impressive trailing dividend yield of 7.8%. That’s far higher than any savings account, and there’s also the potential for capital growth. In fact, the stock’s up 26% over the last year.
There are risks with investing in tobacco stocks, of course. Traditional cigarette sales are declining, and regulators continue to target the industry. Any investor considering this stock must take that into account.
The shares look good value
But British American Tobacco is adapting, expanding into vaping and other next-generation products. If it can maintain its market dominance while growing in these areas, it could remain a strong income stock for years to come.
Another attraction is its valuation. With a price-to-earnings (P/E) ratio of just 8.3, the stock looks cheap compared to many other FTSE 100 companies. I think it’s well worth considering as part of a balanced portfolio of 15-20 stocks, but not risk-free.
Investing always comes with uncertainty, but FTSE 100 dividend stocks have historically proven to be resilient wealth builders. And by focusing on companies with strong cash flows, solid dividend records, and reasonable valuations, an investor could set up a sustainable second income stream.
They should treat their £2k as the start. The trip to building wealth via dividend stocks is to begin as early as possible and stick at it. Starting in March, maybe?
