Diversification’s critical when seeking a reliable second income over time. A broad portfolio can absorb individual dividend shocks better than one containing just a handful of stocks.
Spreading risk over a number of investments doesn’t mean settling for inferior returns either. Take the following shares, investment trusts and exchange-traded funds (ETFs), for example:
| Stock | Forward dividend yield |
|---|---|
| Target Healthcare REIT | 8.6% |
| iShares World Equity High Income ETF | 9% |
| Phoenix Group (LSE:PHNX) | 8.5% |
As you can see, the dividend yield on each of these stocks comfortably beats the FTSE 100 average (currently around 3.4%). It means a £10,000 investment spread equally across them could — if broker forecasts are accurate — provide an £870 passive income over the next year alone.
What’s more, a portfolio containing just these three stocks would provide (in my view) exceptional diversification. In total, these investments deliver exposure to 346 different companies spanning multiple sectors and global regions.
Here’s why I think they’re worth serious consideration today.
The investment trust
Real estate investment trust (REIT) Target Healthcare’s set up to deliver a steady stream of dividends to shareholders. These entities must pay at least 90% of annual earnings out this way in exchange for juicy tax breaks.
By focusing on the care home sector — it owns 94 in total — this trust has exceptional long-term potential as the UK’s elderly population booms. It also benefits from the sector’s highly stable nature, while inflation-linked leases boost earnings visibility still further.
Be mindful though, that labour shortages in the nursing industry could dent future returns.
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The ETF
The iShares World Equity High Income ETF is focused primarily on high-yield and dividend growth stocks. In total, it holds 344 different businesses around the globe, from tech giants Nvidia and Microsoft to insurers like Axa, telecoms such as Deutsche Telekom and banks such as JPMorgan.
However, it also earns income from safe havens like cash and US Treasuries, which provides strength during economic downturns.
The fund’s focused primarily on US shares. In total, these account for 67.8% of total holdings. I don’t think this is overly excessive, but bear in mind that this could impact the fund’s growth potential if sentiment towards US assets more broadly cools.
The share
Phoenix Group, like Legal & General and M&G, is a highly cash-generative financial services provider. And so like those other businesses, it offers one of the three highest forward dividend yields on the FTSE 100 today.
In fact, Phoenix has a sound track record of beating its cash generation forecasts and providing subsequent meaty windfalls to shareholders. During 2024, total cash generation was expected at £1.4bn-£1.5bn. In the end it came in at a whopping £1.8bn!
Like Target Healthcare, I believe it’s well-placed to capitalise on Britain’s growing older population. I’m optimistic demand for its savings and retirement products will grow steadily.
On the downside, this year’s predicted dividend is covered just 1.1 times by expected earnings. However, a Solvency II ratio of 172% could give it scope to meet analysts’ dividend forecasts, even if this year’s profits disappoint.
