If I put £500 in the FTSE 100, how much dividend income could I make?

Naturally enough, I tend to look at the dividend yield of individual stocks when trying to find income. With FTSE 100 offers me exposure to all the dividend potential of the stocks in the leading index.

Here’s how I got from the FTSE 100, and how I can tweak it further.

Looking for my calculator

By taking the dividend yield of all stocks currently included in the FTSE 100, I arrive at an average. At the moment, this is 3.66%. Over the past five years, returns have averaged between 5% and 3%. During the market crash in 2020, it briefly rose close to 7%, but when the market recovered, it quickly returned to normal levels.

Dividend returns are constant, but if I assume I invest £500 now, I could make £18.30 in dividend income over the next year.

If I put this money into an investment pot, I will be able to increase my income for 2024. If I fast forward 10 years, I will return £220. Considering this all comes from an initial £500 investment, that is not bad.

But, is investing in the entire FTSE 100 through a tracker for income? I don’t think so. For example, there are nine stocks at the moment that give me a yield of less than 1%. So why don’t I scrap this and put my money into a higher option?

Switch from passive to active

With £500, I’d rather own a smaller FTSE 100 share. But that doesn’t mean I’m going to concentrate too much on a few stocks. Research has shown that it is possible to achieve a high level of diversification with around dozens of stocks.

Having fewer shares also does not affect the dividend yield. In fact, I think I could get a higher return than if I invested in the entire FTSE 100.

For example, there are 22 stocks with a yield of 5%, or higher. Some have very high yields, which I don’t think is sustainable. But remember, I’m only targeting 12 out of 22. I think it’s a good value if I have people like BT Group, Glencore, Aviva and Vodafone. All these are in 22 potential options.

Of course, dividend income is not guaranteed. I exposed the company to have a bad year and reduce the amount of payments. This is a risk I have to take into account when I try to predict how much I can get.

Let’s assume I build a portfolio with an average return of 6%. Over the next decade, I will earn £409 instead of £220 from before. That’s a pretty big gain by just being active in the stocks I picked.