3 FTSE 100 shares I’d buy for a second income!

At FTSE 100 it is a good place to hunt for undervalued shares with strong yields – that is my opinion, and that is why FTSE 100 shares are also represented in the portfolio.

Naturally, if I want to create a second income stream, I need to invest in dividend paying stocks. Let’s say I’m aiming for £5,000 a year. Then I have to invest £50,000 in shares that pay 10%, which may be risky, or £100,000 invested in shares that average 5%. That is ‘safer’ but costs more money.

However, I will compromise, and aim for an average of 7% on £70,000. That is certainly possible, although it still requires a fair amount of start-up capital.

Reach £70,000

Not everyone has £70,000. So what I can do is start with a smaller amount, say £20,000, and invest in shares that pay 7% over 10 years. Every year I will reinvest the dividends and every month I contribute around £170.

After 10 years, I have £70,000.

This is a compound generating strategy. It’s worth noting that the longer I do this, the more money I have to make (as long as my investment doesn’t lose value, which is always a possibility). The growth is exponential. After 30 years of strategy, I have £380,000.

Create a second income stream

If I’m trying to get the biggest and most sustainable returns, I’ll spread my investment across multiple stocks. I will invest in several companies. But today I’m exploring just three FTSE 100 stocks to use to create a second income stream.

Phoenix Group Holdings is a savings and pensions business that yields 8% and has a dividend coverage of 1.7. Impressively, it has been 13 years of consecutive payments and investors have benefited from consistent dividend growth. It’s certainly not the most exciting business – the share price growth reflects this – but the insurer expects to generate around £1.2bn from additional, organic new business cash generation by 2022.

Next time, I will buy it Legal & General. The company, as part of a five-year plan announced in 2020, aims to grow its dividend by a single-digit percentage every year. In 2021, the company raised 5% annual dividend and the same as the 2022 interim dividend.

Legal & General is a well run company and I don’t expect to have to cut the dividend like that Direct Line. The dividend yield is 1.85 in 2021, and I don’t expect that number to come under too much pressure.

I own both of these stocks – and recently topped both – but I don’t have a third option, Rio Tinto. Miners have been doing well for the past few months, and I want to buy at a better entry point than the current one. However, the long-term outlook for these dividend-paying miners is positive.

Industry can be disrupted by many things, including industrial action and bad weather. However, metal is increasingly in demand in this age of electrification and infrastructure development. For example, Citi analysts predict that copper demand will increase by 7 million tons between 2021 and 2030.

Rio offers 6% yield. So collectively, these three companies can provide an average yield of 7%. That’s enough to turn £70k into £5k a year.