I can’t think of anyone that wouldn’t want an extra £8k a year. That additional amount from a second income could be used for essentials or simply having more fun. Getting the extra £8k is another story. Yet from my calculations, not only is it possible to achieve this from dividend stocks, it can be gained from only a modest monthly investment.
Using stocks despite high interest rates
It’s true that interest rates have been increasing in the UK. At 5.25%, I could simply park money safely in a Cash ISA. Yet at the same time, the yields on some large-cap stocks have been increasing as well.
For example, Lloyds Banking Group has a dividend yield of 5.56% at the moment, closest to the highest level in the past year. Aviva is another case, with the yield jumping from around 6% a year ago to 8.07% now.
Aside from just the dividend yield, an added source of income can be if the stock appreciates in value. If a stock rises X% in the coming years, it’s possible to skim off some of the profits.
As a risk, it’s true that I’m very unlikely to lose value on my capital within a Cash ISA. Yet if I pick a stock that falls considerably in value, it could wipe out all of the benefits from the dividends.
Targeting a yield
Importantly, my strategy hinges on being able to regularly invest £250 each month. It’s also dependent on my average dividend yield.
I’m not going to be overly ambitious and target a yield of 8%-10%. That could only cause my forecasts to be out further down the line. Rather, I’m going to assume an average yield of 6.5%. From my calculations of stocks that I’d include, I feel this is a realistic target.
This doesn’t mean that I’m going to ignore high-yield options. But I’m going to balance out the higher risk associated with these shares with more sustainable low-risk ideas. So if I buy a stock with a 10% yield, I’d look to include another on 3% that I can bank on. In the process, my average yield remains at 6.5%.
Adding in the numbers
Using my average yield, I can then plan forward to see how long it’ll take me to reach £8k in a second income stream.
To help get there as quickly as possible, I’ll reinvest any dividends I get paid to allow my pot to compound.
As it stands, I’ll hopefully reach this mark by year 15. This seems a reasonable timeframe to me. There’s some buffer here. The unforeseen could happen, but if I can boost my yield or my investment amount then things could be quicker.
