2 dividend stocks to take me from £0 to £9.5k in second income

Jon Smith talks through some ideas with second income potential, including one stock that has a dividend yield above 10% at the moment.

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Beginning an investing career from a standing start is never easy. Yet for many, that’s the way it has to kick off. And investors are waking up to the fact that it’s possible to make a second income from dividend stocks even when they have no savings. If I was starting from £0, here’s how I’d go about trying to turn that into a generous annual stream.

The real deal

One stock I’d look to include in my portfolio would be Real Estate Credit Investments (LSE:RECI). The stock is down 13% over the past year, with a current dividend yield of 10.39%.

The business invests in real estate debt secured by commercial or residential properties in the UK and Europe. Therefore, it differs from a real-estate investment trust (REIT) in that it doesn’t own the properties, but rather helps to fund purchases of them.

The dividend yield is very high, with regular quarterly income payments. Of course, with a yield this high, there must be risk involved. This is the case, investing in debt in the property market right now can be difficult! Property developers are struggling under the burden of high interest rates. Some are going bust because they can’t afford the repayments. If enough go bust that are within the fund, it could really hamper performance.

Based on the track record, I think the management team that runs the fund can navigate these murky waters. If interest rates fall, this will certainly help the share price to recover as sentiment improves.

Banking on success

Another example I’d buy if I was starting out would be TBC Bank (LSE:TBCG). I recently wrote about the stock from the angle of capital gains, but it equally applies when thinking about income potential.

The stock has rallied by 38% over the past year but also boasts a dividend yield of 6.8%. Better financial results not only help to increase the share price but also provide more earnings that can be paid out as dividends.

The Georgian bank has benefitted from higher interest rates, enabling it to record a larger net interest margin. Further, the Georgian economy grew by 6.8% in 2023. So there was a greater level of general spending and lending activity for the bank to get involved in.

One concern is that the stock now trades at £31. This is high for a FTSE 250 firm and can make it unattractive for potential investors. If I was only looking to allocate a small amount of money, I wouldn’t get many shares of the company.

Checking the numbers

The average dividend yield of both stocks combined is 8.6%. I’d want to include other stocks in my portfolio to reduce the risk from just these two ideas. But let’s assume I could build a portfolio with this same yield.

If I invested £300 a month, after 15 years I’d have an investment pot that could be worth just over £110k. In the following year, this could pay me out £9.5k in passive income.

Of course, I’d need to reinvest my dividends along the way to help compound growth. There’s the risk that my pot might grow at a slower rate, taking longer to reach my goal. Yet it highlights how this strategy can be very profitable.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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