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:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

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%.

Created with Highcharts 11.4.3Imperial Brands Plc PriceZoom1M3M6MYTD1Y5Y10YALL17 Jun 201917 Jun 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242024www.fool.co.uk

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.

But this isn’t the only opportunity that’s caught my attention this week. Here are:

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£10,000 invested in Apple shares last week is now worth…

Apple shares are down 18% over the past week. It’s a truly phenomenal downward movement, but investors may want to…

Read more »

Investing Articles

Are shares like Tesco a safe haven for investors?

Christopher Ruane sees a lot to like about Tesco shares. But does he see them as a safe heaven in…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

The 2025 stock market sell-off could be a once-in-a-decade opportunity to build wealth in an ISA

If a long-term investor has cash sitting in an investment ISA, now could be a good time to put some…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Is now a good time to start buying shares?

Stock market turbulence can be alarming, but it can also offer opportunity. Our writer considers whether now could be the…

Read more »

Investing Articles

Hunting for passive income? These falling insurance giants offer 10% yields

The UK insurance sector is typically a good place to look for attractive dividend yields. Dr James Fox details two…

Read more »

Investing Articles

Considering a Stocks and Shares ISA this April? Avoid these mistakes!

When opening a Stocks and Shares ISA for the first time, it's easy to fall foul of some costly mistakes.…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

With global markets down 10%+ investors should remember this legendary quote from Warren Buffett

Warren Buffett is the greatest investor of all time. And he says that the best time to buy shares is…

Read more »

Investing Articles

I asked ChatGPT for the best safe havens in the FTSE 100 amid Trump’s tariffs 

Our writer isn't convinced by the answers that AI assistant ChatGPT rattled off when asked about solid FTSE 100 defensive…

Read more »