We’d all like a second income that we don’t have to work for, right? For me, it’s a Stocks and Shares ISA every time. The only work is choosing which stocks to buy, and maybe a quick check on them every now and then.
After that, I just sit back and collect my dividends, which I reinvest.
Filling an ISA
I might split a £20k ISA allowance across five stocks, putting £4k in each. I want long-term income, with diversification to help protect against risk.
I’d have a bank in my starting line-up. They’re out of favour, with inflation, bad debt risk, and all that.
But I could snap up Barclays shares on a price-to-earnings (P/E) ratio of under five. That’s about a third the FTSE 100‘s long-term valuation.
The forecast dividend yield stands at 5.3%. Not the biggest on the market, but I’d take it. As an alternative, maybe Lloyds Banking Group, on a P/E of six with a 5.9% dividend.
Banks have had a tough time, and there’s not much light ahead just yet. But I’ll take the short-term risk in the hunt for long-term income.
I’d want a housebuilder in my second-income portfolio. They face cyclical risk, as we’re seeing painfully in 2023. But isn’t a down cycle the best time to buy?
All the big FTSE builders look good value to me. Taylor Wimpey is on a dividend of 8.2%, with Persimmon on 7.3%, and Barratt Developments offers 7.8%.
Those are forecasts and they might not happen. And where housebuilder shares go in the rest of 2023 is anyone’s guess. But I’d be happy with any of these.
My next income stock pick is either British American Tobacco or Imperial Brands. We’re looking at dividend yields of 9% and 7.8% respectively here, which could help build my second income.
There’s risk in the survival of the industry. And that’s why I’d probably go for British American. It seems better focused on new technology products.
So that’s three of the five slots filled. And for the final two there are so many good options it’s hard to choose.
Some insurers look good, like Legal & General on an 8.3% yield, and Aviva at 8%. Those are financials though, and with a bank already in the pot, I could be hurting my diversification.
I like investing firm M&G‘s 10% dividend, though it’s not as well covered. But again, it’s in finance.
Spread the risk
To avoid raising my sector risk, I might add mining giant Glencore, with a mooted 8.1% dividend.
And to finish, pharma firm GSK. It only offers a 4% yield right now, but I expect long-term progressive dividends.
Why do I talk about buying before it’s too late? Well, these all seem to be overlooked and undervalued right now. There’s risk with them all, which investors need to check for themselves.
But if I’m right, they might not stay cheap for long.