A Second Income With FTSE 100

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 A Second Income With FTSE 100

  A Second Income With FTSE 100


Who doesn't want a passive second source of income, one that works when you are asleep, with the least risk and least costs? The FTSE 100 this time around is giving that opportunity, and it is up for grabs for anyone who has the money to invest and some time to spare to do a little bit of research. The prices of FTSE100 shares are available at a discount like never before, and the index itself has been on an uptrend even though some of the individual stocks are trading at a discount on account of weakness in the Pound Sterling.

The FTSE 100 Index, otherwise known as the Headline index of the London Stock Exchange is the representative of the 100 most significant, most productive, most influential of all companies listed on the London Stock Exchange. At any point in time, the index market capitalization value encompasses at least eighty per cent of the market capitalization value of the London Stock Exchange itself. The companies on this index are not only the largest in the United Kingdom but have operations in multiple countries and have a significant portion of their earnings coming from overseas. Until sometimes back the index was christened as being the barometer of the British Economy itself, which however has now been overtaken by the FTSE 250 Index.

The character of the FTSE 100 index that sets it apart from the other indexes' is the international flavour in it. There are a higher number of companies on this index that are either foreign or have a significant amount of operations and earnings coming from abroad. This benefits the index in two ways, one, it makes it an international index, thereby making itself and the London Stock Exchange a home for global finance and capital raising. Second it shields the London Stock exchange and itself from meltdown should economic fundamentals or other risk factors significantly impact the United Kingdom, the host country of the London Stock Exchange.

By the Lifecycle stage of the constituent companies as well, most of the companies on the index are large well-diversified companies and face a moderate growth prospect with little risk instead of high growth prospect with high risks. Many of these companies offer a reasonable dividend, which, given the turbulent economic scenario faced by the constituents of the index, are giving a higher yield on account of knocked down prices of the stocks. So, if someone is interested in building himself a robust income portfolio with the least amount of risks and costs, then this index is the right choice.

An income portfolio is a portfolio that intends to earn from the passive dividend income from its portfolio of stocks instead of targeting income from capital gains as in the case of a growth portfolio. This portfolio building strategy is a passive strategy and involves the least amount of churning of the portfolio by the fund manager and hence involves the least amount of brokerage and other transaction charges as well. This type of portfolio is suitable for investors who would not be able to invest a lot of time and effort to continually rebalance their portfolios but would instead buy and hold stocks in their portfolio for extended periods of time. The only research work involved however is to pick the right stocks to invest, which have a consistent track record of giving good dividends and to judge whether recent financial performance of the stocks is as per expectations. The investor should not attempt to time the market, so that he can buy the stock when it is available at a discount against its average, short to medium term prices. Timing the market is very risky and that is why the investor should settle for a stable stream of income in the form of dividends.

The current economic climate in the United Kingdom is aggravated by Brexit. Ever since its citizens decided to part ways from the European Union, the entire region has been pushed into an economic and political turmoil. Large scale disruptions in economic activity across the region are happening due to this event. This has affected businesses and the general public have curtailed their activities and postponed their expenditures, which has resulted in a short to mid-term lowering of growth forecast for the entire region. The resultant impact on the London Stock Exchange is two-fold; first the stocks which were impacted most by Brexit have started to underperform, and as a consequence of its cascading affects, the entire market has started to underperform; secondly due to the large scale of outflow of cash from Bank of England to European Union on account of Brexit deal, Great Britain was headed towards a mid-term balance of payment crisis, resulting in a devaluation of the Pound Sterling and as a consequence the stocks quoted in Pound Sterling on the London Stock Exchange have also started to trade cheaper.

While this may not be the right set of circumstances for value picking, this certainly is the right opportunity for someone looking to build an income portfolio. For value pickers this could be a highly risky proposition, as the devaluation of Pound Sterling makes the stocks appear cheap against their intrinsic valuations but actually, they are not as there is no change in their risk-return profiles. However, since the value of currency has come down, companies earning in multiple currencies will be able to pay dividends, which would be higher on yields this year compared to the dividends of the last year at the same payout rate. The target companies on the FTSE 100 to build an income portfolio, however, should be companies who have a majority of their earnings coming from diversified geographies. This will give the investor two benefits; first, since the company's earnings will be in more than one currency its earnings will be higher and, second, the company will be facing less risk as its business is well diversified, translating into less anxiety for the investor. The obvious benefit, however, in the making such an investment is nil taxes to be paid on dividend income, which would provide the icing on the cake.


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