Banking a second income has become a lot more popular since the pandemic. The uncertainty around job security and the state of the UK economy is making a lot of people think about having some form of supplementary income. I think it’s a smart move, and can look to put this into practice through buying dividend stocks. Here’s the deal.
Laying out the framework
The premise is that if I buy a some shares in a business that’s performing well, I’ll be entitled to a cut of the profits in the form of a dividend. Granted, not all companies pay dividends, but it’s easy to filter for the ones that do.
This dividend usually gets paid a couple of times a year. The income I receive from it can either be used to reinvest and compound my investment. Or it can simply be withdrawn and spent on whatever I want.
Instead of just owning one stock and doing this, buying shares in a spread of companies has many advantages. The main one is lowering risk. Having 10 stocks versus one will cut my risk of losing income if the one stock that I hold cuts the dividend. It also allows me to mix the dividend yields. I can target some stable, lower-yielding shares along with some higher-yield options to give me a blended yield.
Of course, I can’t guarantee making a second income from dividend stocks. Anything could happen to a business in the future. Yet in reality, I struggle to think of any income that’s 100% futureproof.
Specific stock inclusions
To explain how I believe I can reach the target of making hundreds in monthly second income, let’s start with the specific stocks.
The five stocks I’d begin with would be NextEnergy Solar Fund (yield of 9.08%), Close Brothers (8.04%), TP ICAP (7.67%), Glencore (7.41%) and St. James’s Place (6.41%).
This gives me a nice mix of banking, energy, commodity and financial services within the portfolio.
From here, I can work out that with equal investment, my blended dividend yield will be 7.72%. My next step is to figure out how much I can invest. Two options to reach my goal are either to invest a lump sum now or put money away each month.
Adding up the numbers
From running the numbers, the first option would involve investing £25k (£5k in each stock). By my calculations, this works out to a total share purchase of 11,260 in the five stocks. Even after the first year, I could be making £160 a month.
The second option is to invest £500 a month and reinvest the dividends to build up the pot size. Using this method, after four years I could have a portfolio worth £28.7k. This would then pay me £184 per month.
All investors are different in the amount they can afford to invest. Yet in picking the right stocks with the right yields, it can be a profitable way to generate for a second income.