There are a lot of ways investors can use extra cash to generate a second income. Cash, bonds, and dividend stocks can all provide extra cash returns on a monthly basis.
Earlier this week, the Bank of England announced that it intends to leave interest rates at 15-year highs. As a result, opportunities for earning extra income over the last decade are likely to be better than they have been for the last 10 years.
Dividend stocks
Dividend stocks typically offer higher returns than either cash or bonds. As a result, I think they’re the place to be for investors looking for passive income.
Right now, a UK government bond with a 10-year maturity offers a return of 4.38%. That doesn’t compare favourably with the yield available on UK stocks like HSBC (7%), National Grid (6%), and Taylor Wimpey (9%).
Furthermore, bond returns are fixed for the length of the investment. Dividends, on the other hand, have the possibility of going up over time – as they often do with the best businesses.
Dividend stocks are intrinsically more risky than bonds. If it comes to it, companies can choose to stop making distributions to shareholders in a way that debtors can’t choose to stop making payments on what they owe.
Which stocks should I buy?
Whether it’s building wealth or earning passive income, the key to investing well comes down to working out which shares to buy. And right now, I think there are some great opportunities in UK real estate stocks.
Investing in real estate investment trusts (REITs) can be a great way of earning a second income. REITs lease properties to tenants and distribute the rent they collect to shareholders as dividends.
Rising interest rates have been weighing on property prices since the start of the year and REITs have seen the value of their assets plunge as a result. But rental demand has generally remained strong across the board.
As a result, I think there are some stocks with really attractive yields in the sector at the moment. These include Primary Health Properties (7%), Supermarket Income REIT (7%), and Warehouse REIT (8%).
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How much do I need to invest?
If I invested across these three stocks, I’d have an average yield of around 7.5%. At that level, I’d need to invest £160,000 to earn £1,000 per month in passive income.
I couldn’t invest all that today, but I could aim to invest it gradually over time and reinvest the dividends along the way to grow my stake further. Using this approach, I could build a portfolio worth £160,000 by investing £1,000 per month for 10 years.
For someone like me, that’s a more realistic strategy than trying to find all the cash up front. And there’s an additional benefit – when prices are right, I could look to buy shares in other businesses.
Doing this would help diversify my portfolio, protecting my investment from a certain kind of risk. This is why I’d be investing gradually in dividend stocks to aim for a second income of £1,000 per month.
