How to build a second income stream with the FTSE 100
Having a second stream of income is an effortless way to help you build wealth with minimum effort.
Being able to earn money while you sleep (or sit on a beach on the other side of the world) not only gives you more freedom to pursue your dreams, but it also protects you against any unforeseen financial disasters.
What's more, having a second stream of income puts you firmly in the driver's seat when it comes to building a nest egg.
Hunting for income
In recent years, a large number of investors have jumped into the private rental market to build a passive income. However, it's now becoming harder to generate a steady, hands-free income in this market thanks to rising taxes and increasing regulation.
Investing in equities is, in my view, a much better strategy. A stream of dividends from the world's largest companies is a truly passive source of income, and you won't have to interrupt your holiday to fix a leaky roof or broken boiler. You can also start to invest with just £100.
The one downside to this process is that choosing which stocks to include in your dividend portfolio is not a simple process. There are plenty of dividend stocks out there, but some of these dividends are safer than others. Indeed, there have been several high-profile dividend disasters over the past 12 months including Carillion, Capita, and Provident which ended up costing investors years of dividend income in capital losses when their problems surfaced.
With this being the case, I believe that the best way to build yourself a passive income from stocks is to use the FTSE 100.
Diversified income stream
The UK's leading blue-chip index contains some of the world's biggest companies, including dividend champions such as HSBC and Royal Dutch Shell. It also includes high growth stocks such as Just Eat. Together, this mix forms a potent combination giving investors the opportunity to buy a ready-made income and growth portfolio at the click of a button.
Overall, the index offers an average dividend yield of approximately 3.9%, slightly above the average of 3.1% for the overall UK market, and significantly above the average interest rate offered on savings accounts today.
Sit back and relax
A dividend yield of 3.9% might not seem like much (especially when rental returns in some parts of the UK exceed 6%), however, it's the passiveness, diversification and flexibility of this income that excites me.
For example, investing in a rental property might make sense when the property is full, but if it is empty or damaged, it can be a massive drain on your finances. Renting out property also requires administration on your part and is no longer as tax effective as it once was.
In comparison, an investment in the FTSE 100 yields income from the 100 largest companies in the UK and can be held in an ISA wrapper, making it immensely tax efficient (especially for higher rate taxpayers). After you've clicked 'buy' there's no requirement to put in any extra effort on your part.
So overall, it is straightforward to build a second income stream with the FTSE 100. All you need to do is buy and forget, and the index's constituent companies will take care of the rest.
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Rupert Hargreaves owns shares in Royal Dutch Shell B. The Motley Fool UK has recommended HSBC Holdings, Just Eat, and Royal Dutch Shell B. 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.