If I put £20k into an FTSE 100 tracker fund, I will get this as a secondary benefit

FTSE 100 Tracker funds have grown in popularity in recent years. These simple investment funds mimic the performance of Footsie while generating a second income in the form of dividends.

Alternatively, there are 'pooled' versions with all profits reinvested in the fund. This will mean going without income today for greater profits in the future.

Here, I'll look at how much I can expect to get in dividends from a £20k investment in an FTSE 100 tracker fund that distributes income.

Needles and haystacks

First, I can definitely see the appeal of this style of investing. I get broad exposure to multiple companies – in this case the UK's top 100 listed companies – with a single investment.

In addition, because an index fund operates on its own, they often cost very little (certainly compared to active funds). Higher fees can eat more into long-term returns.

John Bogle, the founder of passive investing, captured the simplicity of index funds in this timeless quote: “Don't look for a needle in a haystack. Just buy a haystack.”

Net worth

So, how much can a haystack pay me? This FTSE 100 company paid a dividend of 3.6%.

But that doesn't mean I will get that exact yield because dividends are not guaranteed. Companies may cut or cancel their shareholder payments, while others raise them.

For example, a luxury company Burberry recently announced its dividend as it faces declining sales. Vodafone it's because of the cut in half, while Aviva (LSE: AV.) increased its payout by 7.7% last year.

Also, prices move around a lot, which affects yields because of their inverse relationship. So there is quite a bit going on.

As things stand though, the FTSE 100's yield is the aforementioned 3.6%, which is about the range I would expect from the index. So that means I'll be looking at around £720 a year in dividends from a £20k investment.

Note that I have ignored field fees and fund charges here.

Forget the haystack

Is that good? Well, it's better than a wet face pack as my uncle likes to say. But I think I would do much better to buy individual FTSE 100 stocks.

Returning to Aviva, that stock yields 6.5%. That's not far from double the FTSE 100 average.

Even better, City analysts see the insurance company increasing its premiums over the next few years. If those forecasts prove correct, the yield rises to 7.2% in 2024 and 7.8% in 2025.

That would equate to payments of £1,440 and £1,560. Big difference!

Another risk I would highlight for Aviva is its focus on the UK and Irish markets. That may limit growth going forward, as it is a mature market.

However, the company is in a good financial position. In March, its Solvency II ratio was a healthy 206%. It is also buying back £300m of its own shares, while its private health business is booming with NHS waiting lists near a record high.

However, I would be reluctant to put £20k into one stock in case the dividend is cut. But there are 30+ FTSE 100 stocks currently yielding more than 3.6% (and many more). So I don't really need to buy a tracker as a good basket can be built by picking individual stocks.