I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks and Shares ISA. Here’s one to consider for this year.

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People are always trying to sell me the next best side hustle to make a second income. From dropshipping and online teaching to digital marketing and telesales. That’s great, but I just don’t have time for that kind of commitment.

I’ve found the best way to earn a second income with very little effort is by investing in shares with a high dividend yield. Admittedly, it takes some time to build up to a meaningful income but it requires the least amount of effort.

First, find a good ISA

With a good Stocks and Shares ISA it’s possible to maximise returns by minimising tax outgoings. UK residents can invest up to £20,000 into an ISA per year with no tax obligations on the gains.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

There are many different options for a Stocks and Shares ISA so investors are advised to shop around for the one that best suits their individual needs.

Second, grab those high-yield shares

Now it’s time to start shopping for some decent high-yield dividend shares. Dividend yields range from 1% to 10% but they can be tricky – the highest isn’t necessarily the best. The ideal dividend share belongs to a company with a solid track record of actually making payments. That attractive 10% dividend yield is no use to anyone if it never actually gets paid! And trust me, when things get rocky and profits fall, that dividend is the first thing to get cut.

With that in mind, I think a great example stock is National Grid (LSE:NG), with one of the most reliable dividend-paying track records I’ve seen.

The company has managed the provision of electricity and gas to the UK public since the utilities were privatised in 1990. It’s paid dividends bi-annually every year since 2009 without missing a single payment. In that time the dividend has grown from 36p to 57p per share. With a 5.6% yield, it’s in line with the industry average and is forecast to reach 6% in the next three years.

On the flipside, the company has a lot of debt – $46bn worth, which has ballooned by 43% in the past three years. And it isn’t exactly a growth powerhouse. It’s up only 137% in the past 20 years, giving it an average annual growth rate of around 4.4%. That’s fairly low considering the average annual return most UK investors make is 5.3%. So it’s lucky it has a reliable dividend.

Third, compound those returns!

With a 5.6% dividend and 4.4% price growth, compounding is now the key to a second income. Reinvesting dividends and adding monthly contributions can result in exponential growth. 

By investing £10,000 in an ISA and adding a further £100 per month, the investment could grow to around £210,000 in 24 years. At that point, the dividend payments would be almost £12,000 a year – or £1,000 a month. This time period could be reduced by adding other shares to the ISA that improve the returns.

Other promising dividend shares that return similar results include Shell, Imperial Brands and United Utilities. It’s good practice to add several shares to a portfolio to achieve the best mix of returns and yield.

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.

Mark Hartley has positions in Imperial Brands Plc and Shell Plc. The Motley Fool UK has recommended Imperial Brands Plc. 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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