Investing in shares remains one of the most effective ways to create a second income. With an average annual return of 9%, stock markets deliver the reliable long-term wealth boost other asset classes just can’t match.
But what’s the best way to get started? Nowadays, Stocks and Shares ISA investors have tens of thousands of global shares, funds and investment trusts to choose from.
There’s no right answer to this question, unfortunately. Each of us have different financial goals, investing styles and degrees of risk tolerance. However, what history does show us is that the most successful long-term investors take the time and effort to diversify their portfolios.
Here’s how individuals can spread their investments and eventually target a rich retirement income with FTSE 100 shares.
Spreading out
Diversification is one of the most powerful weapons investors can use. Better still, it doesn’t cost a penny to reduce risks that could take a bite out of your returns.
Diversification is the only free lunch in investing.
Harry M Markowitz, economist and creator of the modern portfolio theory
Diversifying your portfolio has a number of advantages. These include:
- Trimming risk, as better-performing shares can help offset losses.
- Providing smoother long-term returns, as different investments often react differently to economic events.
- Allowing exposure to a diverse range of opportunities across regions, industries and sectors.
Tracker funds that follow particular stock indexes often illustrate diversification benefits perfectly. Take the HSBC S&P 500 and iShares Core FTSE 100 exchange-traded funds (ETFs), for instance. They hold shares in a plethora of multinational shares spanning different industries.
Over 10 years, these funds have delivered average annual returns of 15.4% and 10% respectively. Investors can achieve a well-diversified portfolio by buying ETFs, investment trusts, or individual shares. I use a mix of all three.
A £20,623 income
So let’s consider what a diversified portfolio could turn a £20,000 Stocks and Shares ISA into by retirement. If an investor can achieve an average annual return of 9% over 30 years, they’d have a healthy nest egg of £294,612.
If this was then invested in 7%-yielding FTSE 100 dividend shares, this would generate a £20,623 passive income.
Diversification would again play an important role in delivering a retirement income. Dividends are never guaranteed, and a diversified portfolio can reduce reliance on a small handful of companies for passive income.
FTSE 100 dividend star
Standard Life‘s (LSE:SDLF) one top share to consider for a retirement portfolio. The firm’s forward dividend yield is 6.9%, fractionally below our target of 7%. And it has a great track record of dividend growth, with annual payouts rising every year for the last decade. It’s also never cut dividends.
What makes the FTSE 100 company such a powerful dividend provider? Standard Life’s operations are capital light, meaning it doesn’t need huge sums to run and grow the business. As a result, it has an excellent record of generating cash it uses to pay dividends. In 2025, it generated a whopping £423m in excess cash after dividends and other cash commitments.
Competition’s rising across its product lines, which poses an obvious threat. But I’m still expecting Standard Life to keep paying large and growing dividends as its markets rapidly expand.
Should you invest £5,000 in Rolls Royce right now?
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Royston Wild owns shares in HSBC S&P 500 ETF.
