One way I could aim to build additional income streams is by investing in shares I think might pay me juicy dividends. A high-yield share I already own in my portfolio continues to look attractive to me.
If I had spare cash to invest and wanted to take a long-term approach to building a second income, I would buy 10,000 of its shares today.
Double-digit dividend yield
The share in question is asset manager M&G (LSE: MNG). It is unusual for a FTSE 100 share to offer a double digit percentage dividend yield. But that is the case at M&G, which currently yields 10.1%.
Buying 10,000 shares in the business today would set me back around £19,700. I could use my year’s Stocks and Shares ISA allowance to do that. However, I would only consider that because I already own other shares and so could still stay diversified.
If I was investing nearly my whole annual ISA allowance without already owning other shares, I would certainly not put it all into one share.
Juicy dividend potential
With an interim dividend of 6.5p a share due next month, an existing holder of 10,000 M&G shares ought to earn £650 in November.
However, the ex-dividend date for that payout has passed. So if I bought today then the first dividend I would hopefully receive would be the final one. Last year that was 13.4p per share. If it also increases by 5% this year (as the interim payout did) I would expect 10,000 shares to earn me over £1,400.
M&G aims to maintain or increase its dividend each year. That is never guaranteed (for any company). But if the full-year increase is indeed 5%, I would expect 10,000 M&G shares to pay an annual dividend of just under £2,000.
Compounding as a way to build wealth
That is a high yield – and one I would gladly welcome! But it is still a long way off my annual target of earning £10,000 in dividends as a second income.
To try and achieve that, I would wait patiently and reinvest the dividends in more M&G shares rather than taking them out as cash. This is known as compounding and can be an effective way for savvy long-term investors to build wealth.
Compounding like that, after 17 years, my initial investment of under £20,000 would hopefully be earning me £10,000 in dividends annually.
Why I like M&G
That example presumes a flat share price and dividends. In reality they could move around, although the point about the potential power of compounding is clear.
However, just because a share offers a high yield today does not mean that will remain the case. M&G has been raising its dividend. But if it runs into problems, like customers withdrawing funds and hurting earnings, or new competitors pushing down profit margins in the asset management industry, it could cut, or cancel, the dividend. Such risks are why I always keep my investments diversified.
But with a strong brand, millions of customers in dozens of markets and deep experience in asset management, I think M&G has a promising business outlook. It is already one of the most lucrative high-yield shares in my portfolio. With spare money, I would happily buy more.
