I earn a handy second income stream from the dividends paid by my portfolio of FTSE shares, and reinvest every penny. After I retire, I hope to withdraw those dividends as passive income instead, in the hope of funding my final years.

I invest every month by direct debit, which means I don’t have to give the process a second thought. Even a modest regular contribution will roll up over time. The more I pay in and longer I invest, the sooner I’ll achieve financial freedom.

I’m building a portfolio of around 20 UK shares, mostly FTSE 100 blue chips. With luck, they should pay me a rising stream of dividends as companies increase shareholder payouts. Plus, I should get some share price growth on top.

BAE Systems offers income and growth

One of those shares is defence manufacturer BAE Systems (LSE: BA), which has a solid track record of delivering dividends and growth for years.

The BAE share price is up 134.4% over five years, and 27.94% over the past 12 months. It’s been boosted by the unhappy realisation that Russia and China now pose a major strategic threat to the West, forcing governments to up defence budgets.

The AUKUS trilateral security partnership between the US, UK, and Australia has increased demand, as BAE has been selected to co-build Australia’s new fleet of nuclear-powered submarines. The group has also pushing into new areas, notably cyber security. 

First-half 2024 results posted on 1 August showed sales were up 13% to £13.4bn, with operating profit rising 5% to £1.3bn. BAE Systems has a relatively modest trailing yield of 2.24%. However, the board aims to lift payouts year after year and recently hiked the interim dividend by 8% to 12.4p per share. A new £1.5bn share buyback programme commenced in July. BAE Systems has a whopping £74.1bn order book. I find that highly comforting.

Passive income from FTSE 100 shares

Every stock has risks, even BAE. In the unlikely event that global tensions calm, demand for its shares could fall. Many Western countries are unwilling or unable to boost defence spending, as ageing populations stretch budgets. ESG activists are also exerting pressure on the arms sector. Yet in an uncertain world, I want BAE Systems in my portfolio.

The average long-term total return from the FTSE 100 is around 7% a year, assuming all dividends are reinvested. By purchasing individual stocks rather than trackers, I’m hoping to boost that annual return to, say, 9% a year.

Building wealth for retirement is the job of a lifetime. If I invested £250 a month over a 40-year term, and increase my contribution by 5% a year, I’d end up with £1,992,201. This assumes I hit my 9% target.

If I took 4% of that as income each year, a figure known as the ‘safe withdrawal rate’, I’d get a second income of £79,688 a year. Now that’s pretty lavish, if you ask me. Best of all, I won’t have to lift a finger to earn it. The FTSE will do all the heavy lifting, leaving me free to enjoy my retirement. That gives me a real incentive to stick at it.