Building a substantial second income stream that lasts for a lifetime is an ambition shared by investors around the world.
After all, what’s not to like about earning money on the side with little-to-no effort?
One of the ways I could seek to earn such passive income is by investing in UK income stocks.
By doing so, I could earn a decent income thanks to the generous cash dividends that some companies pay out to shareholders.
In search of UK income shares
The UK’s blue-chip FTSE 100 index has a reputation for being home to several companies boasting high dividend yields.
For example, the likes of Legal & General (8.3% yield), Aviva (7.5% yield), and Glencore (8.1% yield) immediately spring to my mind.
As such, while the FTSE index may not be as tightly packed with exciting growth companies in the same way those in the US indexes seem to be, I think it represents ideal hunting ground for investors like me who are looking to build passive income by investing in dividend shares.
Reassured by sustainable dividends
Equally as important is finding FTSE 100 firms with ample dividend cover.
Dividend cover measures how safe and sustainable a company’s dividend is. It does this by showing how many times the dividend is ‘covered’ by earnings.
The measure is calculated as earnings per share divided by the dividend per share.
All three of the companies I mentioned above have a ratio of above 1.5 times. This means that their payouts look as safe as they can on paper.
However, the same can’t be said for likes of M&G. The savings and investment company boats a whopping 10% yield, but it’s not covered by forecast 2023 earnings.
Regardless, I’m conscious that no dividends are ever guaranteed. In any case, there are plenty of examples in the not too distant past of firms being forced to axe their dividend amid unstable macroeconomic conditions.
Playing the long-term game
Nevertheless, thanks to my long-term investment strategy, I’m not at all concerned about the potential for short-term volatility.
In fact, I see market downswings driven by economic uncertainty as an ideal time to hoover up discounted dividend shares.
Being in it for the long run also massively boosts my prospects of building a substantial income stream that’s capable of lasting a lifetime.
Therefore, to make my second income go even further in later life I’d concentrate on reinvesting the dividends I receive in the early days.
This will enable me to benefit from compounding returns. And these will be key to growing my pot at a much faster pace than if I didn’t reinvest.
To illustrate, let’s say that over 20-30 years I manage to build an investment pot worth £500,000.
Assuming I can then achieve an average dividend yield of 6.5%, I’d earn around £32,500 a year in dividend income. That’s not too shabby at all if you ask me.
