How I’m targeting a £10,000 second income from dividend shares

Dividend shares are a great source of extra cash. But Stephen Wright thinks investors looking to finance a comfortable retirement should stay open-minded.

| 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.

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.

For me, the point of investing is to earn extra income in retirement. And both growth stocks and dividend shares can be part of that project.

I own a number of stocks that don’t pay dividends, including Amazon and JD Wetherspoon. But they’re a key part of my plan to earn £10,000 a year in passive income.

A working example

If I were getting ready to retire today, I’d want to be in a position to earn as much income as possible. And sometimes, investing in growth stocks can be the best way to get to that position.

Should you invest £1,000 in Diageo 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 Diageo made the list?

See the 6 stocks

If I’d invested £1,000 in Unilever shares five years ago, I’d have an investment worth £882, plus £138 in dividends. Investing the same amount in Bunzl would have returned £1,491 in market value alone.

If I’d bought Bunzl shares five years ago, I could sell them and buy more Unilever shares today than I’d have if I’d invested in the company half a decade ago. Crucially, I’d receive more income as a result.

Of course, I could have reinvested my dividends to compound my returns. But while that narrows the gap, it doesn’t change the fact I’d be in a better position if I’d bought the growth stock five years ago.

An alternative

My long-term aim is passive income, but I’m not ruling out growth stocks as a means for getting there. But I’m also open to buying dividend shares that I think can perform well. 

Take British American Tobacco, for example. The stock currently has a 9.43% dividend yield, but the company’s share price has been falling fairly sharply since 2017.

To some extent, this might not matter. If – and it might be a big ‘if’ – the dividend is secure for the long term, a 9.43% yield’s a golden opportunity. 

A £1,000 investment compounded at 9.43% a year returns £135 after five years, £212 after 10 years, and £522 after 20 years. With that kind of dividend income, I probably won’t care what the stock does.

A stock I’m buying

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.

One stock I’ve been buying is Primary Health Properties (LSE:PHP). The company’s a FTSE 250 real estate investment trust (REIT) that leases a portfolio of GP surgeries – mostly to the NHS. 

The steady trend of increasing life expectancy in the UK should mean strong demand for its buildings in future. However, as is always the case with investing, there are risks for investors to think about. 

UK life expectancy 1765-2020

Source: Statista

Primary Health Properties has a record of increasing its dividend each year for over 25 years. But the amount of debt on its balance sheet might make maintaining this impossible in the future. 

From an income perspective, any disruption to the dividend (which currently amounts to a 6% yield) would be unwelcome. But the company’s improving its financial position and could be a good long-term pick.

Aiming for £10,000

At an average dividend yield of 4%, I’ll need around £250,000 invested to earn £10,000 a year in passive income. I think that’s achievable, over time.

In terms of where to invest, my plan for the time being is simple. I’m aiming to buy whatever will generate the best return over time – whether that’s growth stocks or dividend shares.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Diageo 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 Diageo made the list?

See the 6 stocks

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Amazon, J D Wetherspoon Plc, Primary Health Properties Plc, and Unilever. The Motley Fool UK has recommended Amazon, Bunzl Plc, Primary Health Properties Plc, and Unilever. 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

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »