Buying shares is one of the easiest ways to generate a second income. However, many people believe they need a large amount of capital to generate any worthwhile returns.
Of course, the more money I have to invest with in the beginning, the quicker I can build larger streams of passive income that I can then use to fund my lifestyle. But that’s not to say that by starting out small I still can’t make a decent amount.
To achieve this, I’m starting as early as possible. I know the longer my money is tied up in the stock market, the better. I’m also targeting high-quality stocks that pay sizeable dividend yields.
I’ve had my eye on two shares lately. Let me explain why.
Banking giant
The first is Lloyds Banking Group (LSE: LLOY). I already own shares in the Black Horse Bank. But at their current price of 43.2p, as I write, I think Lloyds shares could be a steal.
There are a host of reasons I like Lloyds shares. But the main one is its 5.8% yield. The FTSE 100 average yield is around 3.9%, so it trumps that. And while dividends can be reduced or stopped by a business, Lloyds’ payment is covered around three times by earnings.
With the dividend payments I receive from Lloyds, I reinvest them back into buying more shares. That way, I benefit from dividend compounding, which means I earn interest on my original investment as well as the money I’ve reinvested to buy more shares.
There are other reasons I like the stock too. Trading on just 7.7 times earnings, it looks cheap. Stacking this up against the FTSE 100 average of 11 only reinforces this.
I know it won’t all be plain sailing with my Lloyds investment. It relies exclusively on the UK for generating revenue. With the UK now in a recession, this could be a source of concern.
However, I plan to hold Lloyds for decades, so I’ll be ignoring short-term volatility as I continue to buy shares.
Supermarket powerhouse
I highlighted earlier that I like to buy high-quality companies. And that’s why I’m also keen on Tesco (LSE: TSCO). At 3.9%, it yields slightly lower than Lloyds, but that’s still a healthy amount. Its dividend is also covered two times by earnings.
What’s more, the business has also made a beeline for rewarding shareholders in the past few years. As part of the latest share buyback scheme, it’s on track to purchase a cumulative £1.8bn worth of shares since October 2021.
Like Lloyds, there are risks. Tesco faces rising competitors from brands such as Aldi and Lidl. They’ve grown rapidly in the last few years, fuelled by the cost-of-living crisis.
However, Tesco remains the largest player in the space. And with plans of expansion, I’m confident it’ll be able to stave off competition going forward.
I plan to target high-quality companies like these two with any investable cash as I continue aiming to building second income. I plan to buy them today and hold them for the decades ahead. That way, I’ll set myself up for a more comfortable retirement.
