I reckon it’s possible to create a second income from dividend paying stocks.
Let me break down how I could do that, and provide an example pick I’d love to buy to help me if I had the cash to carry out this plan.
The method and maths
Firstly, let’s remember dividends are never guaranteed. They’re paid at the discretion of the business, so there is risk involved here, as with all investments.
I would need a diverse portfolio of stocks that I feel have good fundamentals and prospects to be able to generate cash, and pay consistent dividends.
Let’s say I was able to put £250 per month aside just to invest in stocks. The first thing I would need to do is open a Stocks and Shares ISA or a share dealing account.
Next, I’d start depositing my money and begin investing in stocks with a view to earning dividends.
For the purposes of this article, let’s say I’m aiming to achieve a return of 7%, which is the average rate of return for the FTSE 100 in recent years.
Investing £250 a month, which is £3,000 per year, for 15 years, equates to a total of £45,000. Using the average return I’m hoping to yield, I could earn a second income worth £3,150 per year.
However, the rate of return could drop, making it a longer time for me to achieve my target. Conversely, my rate of return could go up, which means I could achieve my goal even quicker! In addition to this, reinvesting dividends for some time before I start drawing down my income could speed things up.
Smoker’s corner
One stock I reckon could help me achieve my goal would be Imperial Brands (LSE: IMB). It is one of the largest tobacco businesses in the world with an extensive history and wide profile.
The shares are down 16% over a 12-month period, from 1,996p at this time last year to current levels of 1,663p.
It’s fair to say tobacco businesses have been under pressure recently, especially when you look at declining share prices. However, I reckon this is due to the rise of ESG investing, coupled with governments prioritising anti-smoking regulations and messaging in recent years.
Plus, recent volatility hasn’t helped either. The looming spectre of a potential ban on smoking could be something that could hurt Imperial moving forward.
Conversely, the investment case looks compelling to me. Based on recent trading, Imperial still makes cash hand over fist, and this allows it to support a generous returns policy. A part of this is tobacco-based alternatives, which have risen in popularity in recent years. Seeing Imperial move with the times to capitalise and continue to perform well is pleasing.
At present, the shares offer a dividend yield of over 8%, which is higher than my target yield in the example above. In addition to this, the shares look good value for money on a price-to-earnings ratio of just six.
Overall, investing in quality dividend stocks like Imperial when I can could help me garner a second income stream.
