The FTSE 100 may not be packed with tech giants like the S&P 500, but it pays significantly higher dividends. I think investors aiming to build a second income should look no further.
A respectable yield
According to AJ Bell, the UK’s blue-chip index is expected to dish out a whopping £83bn in dividends in 2025. That would be up 5% on 2024, though still below 2018’s record of £85.2bn.
It puts the forward dividend yield at about 3.8%, which is significantly higher than the S&P 500’s 1.3%. Investors could therefore expect a second income of around £760 a year from a FTSE 100 index fund.
As interest rates keep falling, such a yield will look more attractive relative to cash. And that might push share prices higher, in theory at least, adding to the total return.
It’s worth noting that while the S&P 500 has long outperformed the Footsie, the latter is doing well so far in 2025. It’s up 5.3%, compared to little change in the benchmark US index.
If those gains hold, along with the forecast yield, that would be solid return, in my opinion. Especially given all the uncertainty around global trade and US tariffs.
Finally, the FTSE 100 is also significantly cheaper, trading at roughly 13 times forecast earnings for 2025. The figure is around 21 for the S&P 500. I think that looks like a decent margin of safety, even if FTSE 100 company earnings come in lighter than expected this year.
Aiming for higher
Having said that, I wouldn’t invest in a FTSE 100 index fund myself. I prefer to pick and choose what I consider to be the best stocks to hold long term. This includes dividend shares that yield far higher than the average.
For example, one I like the look of right now is insurance group Aviva (LSE: AV.). The stock is up 153% over five years but still looks cheap, trading at 11.3 times this year’s forecast earnings.
Moreover, it’s sporting a forward-looking yield of 6.6%. That’s forecast to rise above 7% next year, while still being covered by expected earnings.
If these forecasts prove correct, then investors with £20k in the stock would collect approximately £1,320 in dividends this year and £1,415 next year.
One thing worth highlighting here though is that Aviva’s proposed £3.7bn acquisition of rival Direct Line is being scrutinised by the Competition Markets Authority. If the deal is blocked, this could limit Aviva’s growth prospects in the UK.
Another risk worth mentioning is the possibility of an economic downturn, which could see customers cancelling some insurance policies.
Diversification
Of course, the risk with investing in individual stocks is that their dividends aren’t guaranteed. Therefore, I don’t put all my eggs in one basket, and instead aim for a nice spread of income shares.
I own shares in Aviva, as it’s growing nicely and management has committed to a progressive dividend policy.
Fortunately, investors wouldn’t have to look far to find other stocks to complement Aviva. The FTSE 350 is packed with high-yield dividend shares right now.
