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Investing in blue-chip shares to build a regular stream of dividends can help supplement incomes. I own a number of FTSE 100 shares for exactly that purpose. While they may not be very exciting companies, some of them regularly throw off large amounts of extra cash and pay it out to shareholders. I am happy to get some of it!
If I had £20,000 in my Stocks and Shares ISA today and wanted to target a £1,250 annual dividend income by investing it in FTSE 100 shares, here is how I would go about it.
Set a strategy
I would begin by being clear about my objectives and then setting an investment strategy I hoped could help deliver them.
With income as my goal, I would be willing to forgo exciting growth prospects. The FTSE 100 contains a lot of slow-growing but highly cash generative companies in mature industries.
Diversification is an important part of risk management for any investor. With £20,000 an ample amount to let me spread my portfolio across different shares, I would split it evenly across five to 10.
Some sectors such as tobacco and financial services have quite juicy yields right now. But I would need to make sure I do not just diversify across firms but also between different sectors. Stuffing my portfolio with too many high-yield financial services shares could be a big mistake if a worsening environment causes them to cut their dividends, as we saw last month at insurer Direct Line.
Pick the shares
My next step would be to choose shares I felt could benefit from a company’s competitive advantage combined with high customer demand.
Some I already own from the FTSE 100 include British American Tobacco (yielding 7%), Vodafone (8.5%), M&G (8.9%) and Abrdn (6.9%). Those four shares alone offer an average yield of 6.3%.
To target £1,250 in annual dividends, an average yield of 6.3% would be high enough. But I would not want to invest in just four shares. As I said above, I would seek to diversify across at least five shares and maybe as many as 10.
Fortunately, right now a number of other FTSE 100 shares look attractive to me. They have good business prospects and what I see as a good value share price. Plus some of them have yields in line with my target, or even above it.
For example, insurers Legal & General yields 7.1% and Phoenix offers 7.7%. Buying some shares with yields above 6.3%, I could still hit my target overall buying some others with a lower yield. I would do that, partly to avoid having my portfolio too heavily concentrated in financial services.
Reap rewards from the FTSE 100
By investing my £20,000 in a carefully chosen, diversified portfolio of blue-chip FTSE 100 companies, hopefully I could set up long-lasting dividend streams.
Over time, some payouts may fall while others will hopefully increase. But for now at least, I would be on course to earn £1,250 a year in dividends while sticking exclusively to large, well-known companies.