One Stocks and Shares ISA allowance, three stocks, for a second income… what would it be?
A 10% yield
I’d have to buy M&G (LSE: MNG). It provides savings and investment services to retail investors. And it offers a forecast dividend yield of 10.3% now.
In a way, I feel that if I buy M&G shares, I’m almost buying market sentiment itself. When times are tough, investors expect stocks to do poorly. So they’ll steer clear of companies making their money from investing itself.
That’s surely only a short-term thing. But it does push share prices down and dividend yields up.
Of course, these people might be right to keep clear. And further pain could damage the dividend. But that’s a risk I think long-term investors just have to face.
Analysts are bullish, though. And forecasts show the dividends keeping up.
Not dead yet
Next choice is British American Tobacco (LSE:BATS). But, isn’t this a business that’s entering its last days, as the world turns away from tobacco?
Some think so, but mostly people in the developed West. And that’s where most of the world’s billions aren’t. Oh, and British American is heavily into the next generation of tobacco products too. That’s why I’d choose it over Imperial Brands.
Still, it’s the biggest risk, and very likely the reason the stock is on a price-to-earnings (P/E) ratio of about half the FTSE 100 average.
The forecast dividend yield? A fat 8.8%.
I think there’s plenty of life (and cash) left in the business to pay towards a second income for a good few years yet.
Refocused and lean
There are some juicy dividends coming from insurance stocks now, and I pick Aviva (LSE: AV.).
The 8.5% forward dividend yield isn’t the biggest in the sector. But I choose it because Aviva has been through its restructuring pain and looks to be coming out the other side well.
Might others feel the same pinch and have to make some changes? The sector is going through a bit of an upheaval, so maybe.
There’s a real risk that the economy could push insurance stocks lower and put pressure on the dividends. And it can be a cyclical sector too.
But I reckon the business could be a long-term cash cow for investors with a horizon of at least a decade, and ideally more.
Where’s the money?
But wait! The average dividend from these three is 9.2%. And if I invest £20,000 in them, I should only get £1,840 per year. So what gives?
Well, I don’t want my income this year, or next. No, this is all about buying stocks today, to give me a good second income in 10 years time.
So, I’d plonk down my £20,000, and keep reinvesting my dividends in more shares. If the dividends don’t change (which they might), I could more than double my pot to £48,220. And 9.2% of that would give me my £4,435 annual second income.
Dividends are very unikely to stay the same. But UK shares have a habit of paying rising dividends over the long term.
