3 stocks to generate a second income

Investing in dividend shares is a perfect way to generate a second income. Here’s three stocks that have major potential to enrich shareholders.

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Earning a second income doesn’t always have to involve clocking up more hours in the workplace. It can be achieved through investing in stocks that pay dividends too. That’s why I personally save to invest in income shares every month.

Here’s three UK stocks that I think have the potential to continue rewarding shareholders with a growing second income stream for many years to come.

Financial services powerhouse

Pensions and insurance giant Legal & General (LSE: LGEN) is one of my favourite stocks for generating reliable income. It has around £1.4trn of assets under management and has steadily increased its payout for decades.

Today, the dividend yield is a market-thumping 7.6%. And as things stand, that could rise to 8% next year. Normally such a high yield might mean a dividend cut was in the works. However, I don’t think that’s the case here.

For 2023, the analyst consensus is for L&G to earn 34.6p per share and pay out 20.5p per share. That indicates the dividend is covered approximately 1.7 times by earnings. Generally, a dividend cover of around two is considered a safe coverage. So the anticipated payout looks sustainable for now.

Longer term, the global demand for pension services will increase as populations live longer. And L&G’s asset management business should grow as stock markets rise over time.

Accelerating demand

If the world is to ever reach net-zero emissions, then there’ll have to be an unprecedented mining boom. That’s the extraction (in vast quantities) of not only rare earth elements, but of all kinds of metals and minerals.

Copper is needed for running electricity, while steel is used to make wind turbines. And electric vehicles require lithium and cobalt. I think a great way to invest in this long-term theme is through BlackRock World Mining Trust (LSE: BRWM).

This trust invests in many companies extracting the metals that make the modern world. These include mining behemoths BHP, Rio Tinto, and Glencore.

There’s been chronic underinvestment in the mining sector in recent years. So I expect this supply-demand imbalance to keep metal prices elevated for the foreseeable future. That should equate to rising profits and payouts.

At 760p per share, the trust offers a dividend yield of 4.3%.

Resilient brands

With a dividend yield of 2.2%, drinks giant Diageo isn’t normally considered an income stock. However, the company has a remarkable record of over two decades of dividend growth.

And management last week reiterated its medium-term guidance for “sustainable organic operating profit growth in the range of 6% to 9% for fiscal 23 to fiscal 25“.

This increasing profitability is driven by the firm’s premium brands, which include Johnnie Walker whisky and Don Julio tequila.

Diageo’s dividend per share has gone from 62.2p in fiscal 2017 to an expected 80.5p this year. I anticipate it will only head north in the coming years.

However, it should be noted that a deep recession might severely impact the performance of these stocks. Commodity and equity markets could fall, and consumer spending on alcohol could take a big hit. If earnings go south, then dividends could be cut to preserve capital.

However, over the long term I expect these stocks to prove resilient and offer investors fantastic second income potential.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in BlackRock World Mining Trust Plc, Diageo Plc, Glencore Plc, and Legal & General Group Plc. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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