I’d buy these FTSE 100 shares to earn a second income

Big hat FTSE 100 indexes can be a great way to earn passive income. This is because there are few high-quality dividend stocks.

The dividend yield on Footsie is 3.6%. That doesn’t strike me as particularly lucrative now. Especially with the Bank of England base rate at 4%.

That said, in the FTSE 100 there are around a dozen dividend stocks offering 6% or more. That’s what I focus on when looking for income stocks.

Above the FTSE 100 share

If I had the money, I would buy it Phoenix Group Holdings (LSE: PHNX). It is a UK-based savings and pensions business. It currently offers an 8% dividend yield. This is one of the highest results in the current lead index.

With an investment of £5,000, that equates to around £400 in dividends per year.

The company offers a stable business model with a solid balance sheet. It grows organically and by buying small companies.

2022 is an encouraging year for this insurance based business. And the future looks bright too. Phoenix set a new target to generate an additional £1.5bn from cash generation by 2025. Much of this should support future dividend growth.

Note that dividends can be cut at any time. They depend on their earnings and any shock to their business can affect their dividends.

When looking for the best income stocks, I like those that show a long history of dividends. Phoenix is ​​no exception. With 13 years of back-to-back dividend payments, it gives me great comfort in priority.

Special dividends

Income investors often overlook the special dividends that some companies sometimes distribute to their shareholders. These non-regular payments are usually paid from the excess cash generated by the business.

For example, value retailers B&M European Value Retail (LSE:BME) has a policy of giving a portion of its excess cash flow to shareholders. It currently offers a yield of 3.4%. Although it is less than the FTSE 100 average, it becomes more attractive when it comes to special dividends.

Including these additional payments, B&M’s yield rose to 7.5%. A word of warning though. Investors who rely on such special dividends may be left disappointed if they are not distributed for a year. They are definitely not guaranteed.

That’s why I prefer to have a diverse selection of investments in my Stocks and Shares ISA. That is to put all the eggs in one basket.

Quality, value and income

If I had the money to invest today, I would still buy B&M. But it’s not just for dividend income. I love this business because of its disciplined cost control, flexible product sourcing, and focus on value for money.

As the cost-of-living crisis continues, I think B&M’s value offering should remain popular.

I also describe it as a quality part. It is because it offers a return of 19% of the capital employed. This measure of business quality is often cited by veteran investor Terry Smith. It shows how efficiently the company turns capital into profit.

Quality, value and income can prove to be a winning combination, in my opinion.