In my view, the best thing about building a passive income stream is that it has the potential to generate consistent returns with minimal effort.
When it comes to building my own passive income, my chosen approach is to invest in high-quality FTSE 100 dividend stocks.
This is because the UK’s blue-chip index is home to a range of companies boasting generous dividend yields.
With that in mind, here’s how I’d invest in Footsie income stocks to target a second income that could bag me an extra £130 a month.
Making the most of the ISA allowance
First, let’s assume I invest my full £20,000 Stocks and Shares ISA allowance in one go, using the money to buy UK shares with an average dividend yield of 8%.
This would enable me to receive around £1,600 per year in dividend payments, which translates to roughly £133 per month.
That’s a pretty tidy second income considering there hasn’t been any time for my investment to grow over the years.
After all, the benefits of buying income stocks become even clearer in the long run.
FTSE 100 dividend stocks
But which income stocks would I buy? Well, I’m not satisfied with buying a particular company’s shares solely on the basis of a high yield. Instead I have to be confident that its dividend payout is sustainable.
Nevertheless, I need to target such companies that will also enable me to achieve an average yield of 8% for my portfolio.
The good news is that a fair few FTSE 100 shares boast attractive yields that look well covered at current levels.
For example, fund manager M&G yields a whopping 9.83% and financial services group Legal and General yields 8.57%.
Additionally, the housebuilder Taylor Wimpey and mining company Rio Tinto yield 7.56% and 8.08% respectively.
In my view, the key advantage with each of these companies is that they’re all large, blue-chip companies with businesses I feel I can understand comprehensively enough to assess.
That said, my journey towards building a second income is highly unlikely to be all smooth sailing.
For example, an obvious risk with these companies is that some may be forced to axe their dividend amid harsh business conditions.
Reaping the benefits of being in it for the long term
Nevertheless, my long-term outlook should enable me to ride out the inevitable periods of volatility.
Plus, up until this point I haven’t even been factoring in share price growth. On the whole, there’s a pretty good chance I’d be able to generate a substantial amount of that over the next 20-30 years.
As such, after hoovering up a handful of high-yield FTSE 100 shares, I’d sit back and allow my dividends to compound. This means reinvesting them by buying more shares.
This way, I could actually work towards surpassing my initial target of £130 passive income each month.
