Investing £5 a day in this dividend giant can make me a £14,067 annual second income!

This FTSE 100 high-yield star can make me a major second income, supported by a strong business outlook and an apparently undervalued share price.

| More on:
Hand arranging wood block stacking as step stair on paper pink background

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Generating a second source of income can help take the sting out of life. It can provide an additional safety net for some major unexpected expenses. And it can fund a nicer place to live, more exotic holidays or an early retirement, perhaps.

Even better is if this can be made through minimal effort daily. And the best way I have found of doing this is by investing in shares that pay high dividends.

Starting from nothing in the bank

Many people are under the misapprehension that they need a sizeable chunk of money to start investing in shares. But this is not true.

For the price of a fancy coffee or a pint of beer each day, anyone can build a big second income.

£5 a day (£150 a month), for example, invested in a stock like Imperial Brands (LSE: IMB) would currently yield 7.4% a year.

So, in the first year, this would make £133 in dividends. This might not seem a lot, but it is only the start of the process.

Every penny put into a dividend-paying share can be turbo-boosted to an extraordinary degree through what is called ‘dividend compounding’.

This means using the dividends paid each year to buy more of the stock, which in turn means more dividends.

Big second income generation?

Given £5 invested daily, and an average yield of 7.4%, after 10 years the total investment pot would be £26,360! This would pay £1,951 a year in dividends, or £163 every month.

That is not guaranteed, of course, but if this was kept up over 30 years, then the total would be £190,097. This would pay £14,067 each year, or £1,172 every month!

Does it have a history of high dividends?

I hold Imperial Brands shares in my high-yield portfolio, and it has consistently paid high dividends.

In the past five years, working back from 2023, it paid 7.4%, 7.6%, 8.9%, 10.1%, and 11.3% in dividend yields.

Consensus analysts’ forecasts are for the dividend to rise to 163.3p a share in 2025 and to 171.7p in 2026. On the current £19.95 share price, this would give respective yields of 8.2% and 8.6%.

How does the business look?

Dividends are powered over time by earnings and profits, so a strong business is essential to me in picking shares.

There are risks in all companies, of course, and Imperial Brands is no different. It is currently transitioning away from tobacco products and towards nicotine replacement ones. So, the main risk here is that this transition falters, allowing its competitors to gain a market advantage.

However, the underlying business looks good to me. Its full-year 2023 results showed operating profit up 26.8% from 2022, to £3.4bn.

In H1 2024, its adjusted operating profit rose 2.8% year on year. Net revenue growth for its next-generation nicotine products increased by 16.8% in the period.

Overall, consensus analysts’ estimates are that its earnings per share will rise by 5.9% a year to end-2026. Return on equity is forecast to be 47.9% by that point.

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.

Simon Watkins has positions in Imperial Brands 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.

More on Investing Articles

Investing Articles

2 of the best US growth and dividend stocks to consider!

These heavyweight US stocks have been delivering tasty investor returns for decades. Here's why they could remain great picks for…

Read more »

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »

Investing Articles

Here’s my Rolls-Royce dividend forecast for 2024-27!

Our writer considers whether the Rolls-Royce dividend might be reinstated in coming years, based on financial performance and stated payout…

Read more »