One is to put some money into shares that will hopefully pay dividends. This can be lucrative, especially for someone with the patience to adopt a long-term approach to investing.

For example, if someone had a spare £20k available to invest in dividend shares, here is how they could target an average monthly second income of £672.

Taking the long view

A key element here is letting dividends fund more share purchases that in turn can hopefully pay more dividends.

This is a simple but potentially very powerful financial move called compounding.

To show how this works, imagine that the £20k is compounded at an annual rate of 7.5% for 25 years. At the end of that period, without contributing any new money, the portfolio ought to be worth almost £122k thanks purely to compounding.

At a 7.5% dividend yield, that should generate around £672 a month by way of a second income.

Keeping a lid on costs

That compound annual growth rate can come from dividends, rising share prices or both. But it is important to remember that, just as dividends are never guaranteed, share prices can move down as well as up.

One factor that can eat into returns is the costs you pay to buy, sell or even just hold shares.

So, it makes sense to shop around when it comes to choosing a share-dealing account, Stocks and Shares ISA or trading app.

Aiming for strong performance

Is a 7.5% compound annual growth rate achievable? After all, the FTSE 100 yield right now is only 2.9%.

With careful selection of a diversified portfolio of dividend shares, I think it can be a realistic goal.

As an example, one share I think investors should consider is paper manufacturer Mondi (LSE:MNDI) with its 6.4% yield. Although Mondi is in the elite FTSE 100 index, it is a share that many small investors may not be familiar with. As an industrial supplier, it is not a consumer-facing brand.

However, Mondi is in fact a large multinational company. Its operating footprint in multiple markets worldwide gives it breadth and its range of packaging and paper products gives its depth.

Despite all that though, the share price has more than halved over the past five years.

That has been good in that it has pushed up the dividend yield. But it hardly seems like a ringing endorsement of the business. What’s going on?

Put simply, after high demand during the pandemic, a global mismatch between demand and supply has pushed packaging prices down, hurting profit margins in the industry.

That is an ongoing risk for Mondi. Although at the half-year point, its dividend cost was comfortably covered by operating cash flows, other costs meant that the six-month period saw free cash outflows overall. If that state of affairs continues, the dividend could be cut.

However, with a proven and sizeable business, I am optimistic Mondi can plough on and hopefully benefit from a recovery in packaging prices at some point. That could push up the share price, as well as help fund the dividend at its current or even a higher level.

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Fortunately, not all passive income ideas are pie in the sky. In fact, while the term passive income may be modern, people have been earning it for centuries already.

One old approach that can still be very lucrative today is putting some money into carefully chosen blue-chip shares that pay dividends.

Why I like dividend shares as an income generator

This approach has quite a lot going for it, in my view.

It is genuinely passive, for starters.

Rather than hoping a new small business like a drop shipping website takes off, this approach rides on the coat tails of existing, successful businesses. They have proven they can generate excess cash and use it to fund dividends.

There is also no set amount of money required, so someone can adapt the approach to their own financial circumstances.

Just how much income could dividend shares generate?

Oh did I mention it can also be fairly lucative?

For example, imagine someone starts today with nothing.

First, they choose what Stocks and Shares ISA to use (though a share-dealing account or trading app could also work). Then they put in £500 each month and invest in dividend shares.

Compounding the value at 7% per year, after 16 years the portfolio ought to be worth around £172k.

At a 7% dividend yield, that would generate over £1,000 in passive income per month, on average.

What’s a realistic goal?

My 7% compound annual growth rate could come not only from dividends, but also share price growth.

Prices can fall too, though – and dividends are never guaranteed. So although this plan is simple, I think someone who takes it seriously will focus on building a diversified collection of high-quality shares and hopefully not overpay for them.

What about a 7% yield? Nobody knows what the market will do over the next 16 years, but at the moment the FTSE 100 yields a much lower 2.9%.

Still, through careful share selection, even in today’s market I think a 7% yield could be a realistic target.

Turning paper into money!

As an example, one share I think investors should consider for its passive income potential is FTSE 100 paper and packaging manufacturer Mondi (LSE: MNDI).

At first blush, its 6.9% yield certainly grabs attention.

But there is a reason the yield is high, even though Mondi has held its dividend per share flat lately. The Mondi share price has fallen by 56% over the past five years, pushing up its yield.

That share price fall reflects some of the risks here. Packaging pricing has weakened in recent years, hurting profitability. Mondi faces the risk that profit margins in its business may contract further.

Over the long term, I expect the industry to balance demand and supply better, helping profit margins. Mondi is a well-established multinational operator, with deep capabilities and a large customer base.

This is not some exciting growth stock. But from a passive income perspective, I like the ongoing potential in Mondi’s longstanding operations.

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Finding those bargains, on the other hand, is a difficult task. That’s because the best opportunities often come at times of maximum pessimism. How many were banging the drum for Rolls-Royce shares while Prime Minister Elizabeth was enacting ‘Trussonomics’? Those who did could have walked away with a 20 times return.

Where might such bargains be hiding today? One place to look is at stocks trading at 10-year lows. A share price at its lowest point since 2016 doesn’t guarantee a once-in-a-decade opportunity, but you never know…

According to the latest data (as of 21 January), the FTSE 100 is holding four stocks that are trading at or very close to a 10-year low.

Bargain basement?

Before getting into what I believe to be the most interesting of these four stocks, I’ll rattle off what’s going on with the other three.

Diageo shares won’t come as a wild surprise to anyone who has been following changing drinking habits. Drinks-makers across the planet are building up huge stock reserves as people are drinking less.

Diageo has fallen to a price-to-earnings ratio of just 12. There could be a lot of value on offer here if lower alcohol consumption is a temporary phenomenon.

Barratt Redrow shares (formerly Barratt before the merger) are looking cheap too, down at 384p. The ongoing demand for houses in the UK should help the housebuilder over the long term.

The risks here are manifold, however. Margins are decreasing from both sides with issues plaguing the housebuilding sector, including higher wages and supply costs, and also falling house prices.

Croda shares have seen one of the most staggering declines in recent years. The share price in the chemicals company has fallen by 73% since 2022. The firm is at risk of being booted out of the FTSE 100. That could signal an opportunity if the company can overcome increasing regulations and pressure on its margins.

Looking good

If asked to pick which of the four possible once-in-a-decade stocks I think is worth considering, I’d plump for Mondi (LSE: MND) shares. The packaging and paper company has seen something of a slowdown since the pandemic.

One important factor is the global economy. In good economic times, folk order more stuff through the post and businesses make more deliveries too. If a recession comes along in the next few years, this would be a risk.

But the overall trajectory of packaging solutions looks good to me. The rise of online shopping and the slow death of high streets seems to be an inexorable process. If so, then Mondi shares – trading at just 12 times forward earnings – could prove to be a bit of a bargain sooner or later. I’d say this one is a stock to consider.

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That’s something I do myself. Investment performance can be cyclical, and it’s a great feeling when an undervalued stock suddenly takes off. Can these three long-term losers start to show their comeback potential?

Barratt Redrow needs underpinning

These are tough times for housebuilders, and last year was no exception, with the Barratt Redrow (LSE: BTRW) share price falling 11%. It’s down 45% over five years. A full decade ago the shares traded around 600p. Today, they stand at 375p.

Brexit, high inflation and mortgage rates, and the end of the Help-to-Buy scheme have all hit demand for new homes, while rising labour and materials costs squeezed margins. The cladding fire safety scandal didn’t help.

There are brighter signs emerging, as housing demand picks up after Budget uncertainty and interest rates slide. Barratt Redrow looks decent value on a price-to-earnings ratio (P/E) of 14.8, while the trailing yield has crept up to 4.7%. This could be a once-in-a-decade chance to buy at a low price, before the outlook improves. No guarantees though, as the UK economy remains fragile and affordability is still an issue.

Croda is getting cheaper

Croda International (LSE: CRDA) is another long-term struggler that intrigues me. It makes speciality chemicals used in beauty, agriculture, and life sciences, and demand surged during the pandemic as customers stockpiled vital materials.

The shares spiked to around 10,000p in 2020, then plunged as orders slumped. At today’s 2,650p, they’re lower than they were a decade ago. Today might mark a potential turning point, as customers have mostly worked through their pandemic inventories, and sales start to recover.

Croda’s dividend yield has climbed to 4.2%, and the shares look better value than they have done for ages, on a P/E of 18.9. But Croda still has work to do on sales and margins, and I don’t think it’s quite there yet.

Mondi continues to struggle

Paper and packaging specialist Mondi (LSE: MNDI) is another FTSE 100 stock trading below its level a decade ago. After booming during the initial e-commerce boom and again during the pandemic, when we were glued to our screens at home, its shares slumped as the cost-of-living crisis hit demand. They’re down 25% over the last year and 50% over five.

I suspect we may have to wait a while longer for the recovery, as consumers continue to feel the squeeze, hitting demand, while key markets are oversupplied and the price of paper falls. However, the forward yield of 5.1% should offer some consolation, while the shares look good value. With a P/E of 12.4, Mondi is cheapest of the three.

All three are worth considering, but Croda and Mondi may need another year or two before they show their mettle, while falling interest rates could make Barratt Redrow the more immediate turnaround play. The next decade should be better than the last for this underperforming trio, but investors may need to be patient.

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The FTSE 100 has shot back to form over the last year, as global investors quit their addiction to the US tech mega-caps. As fears of an AI bubble grow, investors are seeking solace in the old school blue-chips such as banks, insurers, miners, utilities and pharmaceuticals.

in particular, they like the dividends they pay. As interest rates fall, and the risk-free yield on cash and bonds falls with it, FTSE 100 and FTSE 250 income shares look even more attractive. It’s still possible to get yields of 6%, 7%, 8% or more, with any capital growth on top. But maybe not for much longer.

Top shareholder returns

UK equity valuations are climbing as the FTSE 100 bursts through the 10,000 barrier for the first time in history, and continues to power upwards. Today, the price-to-earnings (P/E) ratio for UK stock market is 19.92, up from around 15 last year. There are fewer bargains as a result.

As share prices rise, dividend yields automatically fall. A year ago, the average FTSE 100 yield was around 3.5%. Today, it’s 2.95%, still attractive, but not as good as it was.

It’s nowhere near as good as the yield available to investors who buy individual stocks rather than a tracker. Insurer Legal & General Group boasts the highest yield on the FTSE 100 at 8.15%, followed by two more financials, Phoenix Group Holdings (7.38%) and M&G (6.84%).

The shares have been buzzing too, but I’ve covered them a lot lately, so I’m keen to explore other opportunities. One is paper and packaging specialist Mondi (LSE: MNDI).

The Mondi share price has taken a battering lately. It’s slumped 23% over the last year, and 52% over five.

Mondi’s in a tough sector, as much of the demand for its product comes from e-commerce, boxing up all that stuff we buy online. But with consumers feeling squeezed, EBITDA earnings fell from €1.2bn in 2023 to €1bn in 2024. The board froze the dividend per share at 70 euro cents for the second year, while it waits for better times.

Lots of high FTSE yields out there

Despite that, the trailing yield remains a bumper 6.66%. Plus the shares are much cheaper than the FTSE 100 average, with a P/E of 12.5.

Mondi operates in a cyclical market and its recovery could take time as consumers struggle. So anybody considering this stock may have to be patient. The consolation is that they can re-invest their dividends at the new lower price while they wait for it to take off again.

This strategy won’t suit everybody. Investors may want to explore other high FTSE 100 yields, such as Land Securities Group (6.5%), British American Tobacco (5.83%), Admiral Group (5.75%) and BP (5.68%).

Some of these stocks have struggled like Mondi, but now could be a good time to consider them with a long-term view. We may not get another chance like this for a while.

The post UK shares: a once-in-a-decade chance to build a fabulous second income? appeared first on The Motley Fool UK.

In the FTSE 100 alone, more than 30 companies offer a yield of at least 4%. And among the most generous payouts sit M&G (LSE:MNG) and Mondi (LSE:MNDI) with annual dividends at 7.35% and 6.89%, respectively.

That means if someone splits a £10,000 investment equally across both companies, they could unlock just over £700 in annual passive income. Of course, that’s assuming dividends aren’t later cut – a risk that many high-yield income shares tend to carry.

So, are the payouts from M&G and Mondi ‘safe’ from this risk? And are these stocks worth considering as long-term investments? Let’s find out.

Insurance and packaging

Mondi and M&G are very different businesses. The first is an international sustainable packaging manufacturer, while the latter is an insurance and asset management giant. Yet they share a similar key trait: both are highly cash generative.

Even with cyclical headwinds in packaging demand from the industrial sector, Mondi’s cash profits have remained resilient and relatively stable compared to a year ago.

Considering the market backdrop the firm is operating in, while not terrific, its performance remains robust. And with management diversifying into the European e-commerce packaging market, growth could start to emerge next year. As such, even with a high yield, dividends have been maintained.

M&G is in a similar financial position, where growth isn’t spectacular, but underlying cash generation remains strong, funding an impressive payout.

But if both dividends look sustainable, why aren’t more investors capitalising on these income shares?

Where’s the risk?

As previously mentioned, Mondi is busy diversifying its revenue stream to benefit from the continued rise of online shopping logistics. However, even with good progress so far, this remains a small fraction of overall cash flows.

Right now, the bulk of demand continues to stem from European industrial manufacturers. And this sector is currently in the middle of a few challenges. A softer manufacturing environment, an oversupply of paper packaging, and a shift to just-in-time inventory models are dragging down the price of packaging materials.

M&G’s situation is a bit more complex. Despite its asset management arm seeing a resurgence in demand, de-risking activity with the UK defined benefit pension market is causing massive amounts of capital migration. And consequently, £5.1bn of client funds flowed out of M&G’s pockets during the first six months of 2025.

Overall, the group’s net client flows improved versus 2024. But nevertheless, £2.5bn left M&G’s ecosystem, reducing the group’s fee-earning opportunities.  

Where does that leave investors?

Both Mondi and M&G are facing cyclical shifts in their respective markets. And with M&G’s accounting being significantly more complicated, it’s not surprising to see a higher yield on offer.

However, personally, I’m currently not tempted by these yields. While the underlying fundamentals look solid enough, both Mondi and M&G are somewhat at the mercy of their respective cycles.

While both will eventually recover, there’s a big question mark on the exact timing of these events. And if market conditions worsen, a dividend cut might rear its ugly head. So instead, I’m looking at other passive income shares for my portfolio.

The post £10,000 in these income shares unlocks a £712 passive income overnight appeared first on The Motley Fool UK.

Here’s how to aim for that.

Invest, then relax

Right now, the FTSE 100 offers investors a 3.11% dividend yield. That means for every £100 invested in large-cap UK shares within an index fund, investors will earn £3.11 without having to do any work. Yet by being more selective with a stock-picking strategy, an investor can potentially double their passive income potential closer towards 6%.

If executed correctly, that means investors can earn £6 for every £100. And it drastically reduces the portfolio size needed to unlock the equivalent of a £45,000 salary from £1.45m to £750,000 – almost half.

Of course, three-quarters of a million pounds isn’t pocket change. But with £5,000 starting capital and a further £450 to spare each month, reaching this six-figure threshold is far more achievable than most might think.

Let’s assume a 6%-yielding portfolio also generates a 4% annual capital gain, in line with the stock market average. The combined total return is 10% a year. And drip feeding £450 each month at this rate of return, starting with £5,000, surpasses the £750,000 threshold in less than 27 years.

That’s perfect timing for a 40-year-old investor aiming to retire by 67. And those fortunate enough to start investing earlier could unlock an early retirement or continue working and investing to earn even more passive income.

So which UK shares offer a 6% yield today?

Exploring income options

Looking again at the FTSE 100, there are several stocks offering this payout or more. It includes Mondi (LSE:MNDI), Land Securities Group, and LondonMetric Property, among others. And the list gets even longer when looking to other indexes like the FTSE 250.

But as experienced investors know, just because a yield’s high doesn’t mean it’s a good investment. That’s because a high yield often comes with more risk.

So let’s take a closer look at Mondi. Is it an income opportunity or a trap?

Earning dividends from packaging

Mondi’s a leading manufacturer of sustainable packaging materials, playing a vital role in the logistics value chain, primarily for the industrials sector.

In recent years, Mondi’s been diversifying away from industrials to capitalise on the growing packaging needs of the e-commerce sector. That’s a smart move. Not just because e-commerce continues to grow rapidly, but because industrial manufacturing is currently in a bit of a slump.

Economic uncertainty has resulted in weaker manufacturing output across multiple regions, lowering demand for Mondi’s products. In fact, that’s why its shares have underperformed in the last 12 months, driving the yield to 6.9% today.

This demonstrates Mondi’s cyclical risk. And while management’s deploying cost-cutting measures, dividends are at risk of cuts if external market conditions don’t improve.

The industrial sector will eventually recover. But sadly, the exact timing of this recovery remains a mystery. So with that in mind, Mondi shares might not be a wise investment to consider right now in terms of risk-to-reward. Luckily, there are plenty of other income options to explore.

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Look at Legal & General’s yield!

I’ve started with the highest yielder on the FTSE 100, Legal & General Group (LSE: LGEN). This pays income of 8.7%, and has a solid record of dividend growth this millennium.

It did cut shareholder payouts in 2008 and 2009, but that was during the financial crisis. It froze them during the pandemic in 2020, as did many others. Otherwise, the board’s increased shareholder payouts every year, and at an average rate of 6.12% over the last decade. 

Dividend growth looks set to slow but the shares are still forecast to yield 9.22% in 2026. Over the next three years, the board plans to return a total of £5bn through dividends and share buybacks. As with every stock, there are risks. The shares have idled, leaving the income to do the heavy lifting.

Legal & General operates in a competitive market and must fight for its share of new opportunities such as bulk annuities. But I think it’s worth considering for income-focused investors.

Mondi’s dividend-heavy too

Shares in paper and packaging specialist Mondi (LSE: MNDI) have also struggled lately, falling 25% in the last year.

Mondi’s been hit by the cost-of-living crisis, as cash-strapped consumers buy less and online retailers use less cardboard.

Yet as the shares slide, the yield has climbed to 7.07% a year. And that’s despite Mondi freezing the dividend for the last couple of years. The shares look inexpensive and could rally nicely if the economy picks up in the next year or two. That’s a big if though. Worth considering, just bear these concerns in mind.

Land Securities Group income

The yield from Land Securities Group (LSE: LAND) is also high at 6.74%. This is a real estate investment trust (REIT), which has tax advantages. And again, it’s got a solid dividend growth record, hiking shareholder payouts every year this millennium except three (twice in the financial crisis, once in the pandemic). The pace of growth has been a modest 2.35% over the last decade.

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.

Shares in Landsec, as it’s also known, have also struggled. They’re flat over 12 months and down 9% over five years. It owns commercial property such as shopping centres and office blocks. The former have been hit by the rise of e-commerce and the cost-of-living crisis, and the latter by the work-from-home trend.

An uncertain property market hasn’t helped. Last month, Landsec reported a sharp drop in pre-tax profits from £243m to £98m, following a £67m loss on a property sale that generated little or no return.

I think it’s worth considering, but only for more experienced investors who know what they’re getting into.

All three offer a brilliant yields. Combined, they have an average yield of 7.5%. That would produce income of £1,500 a year to somebody who invested their full Stocks and Shares ISA.

The shares may have underperformed but investing’s cyclical and all three have recovery potential. If investors don’t fancy them, they’ll find plenty more top dividend shares on the FTSE 100 with better growth records.

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WPP stock has tanked!

My first dodged bullet is advertising group WPP (LSE: WPP). It’s the worst performer on the index down 60% over five years and 65% over 12 months.

The business was already wobbling when I considered buying, as it dealt with the bruising departure of driving force Martin Sorrell in 2018 after three decades. I like buying into companies when they’re out of favour in the hope of a rebound further down the line. There’s been no rebound here.

Advertising spend slid as the cost-of-living crisis left consumers feeling stretched. The pressure on WPP intensified as companies pulled more marketing in-house. The big tech giants are capturing more of the global ad market, while advances in AI encouraged businesses to produce content in-house.

The shares look cheap with a price-to-earnings (P/E) ratio of 5.95, but the apparent 13% yield is illusory because the dividend is being cut. I wouldn’t consider it today.

Persimmon has crumbled

The last five years have also been miserable for Persimmon (LSE: PSN). The shares are down roughly 50%, though there are signs of a recovery, as they’re up a modest 6% in the last year.

It’s been tough for housebuilders as high interest rates push up mortgage costs and squeeze demand, worsening affordability issues. The end of the Help to Buy scheme in 2023 removed a prop of support.

Yet investors might consider buying Persimmon shares today. Interest rates could fall further over the next year, cutting mortgage costs and reviving activity. I don’t expect house prices to rocket as wage growth slows and unemployment climbs, but we still have a housing shortfall. Persimmon is forecast to yield 4.55%. The shares trade on a price-to-earnings ratio of about 14.4. It might be one to consider buying for the next five years.

Cardboard demand under pressure

My final near-miss is paper and packaging specialist Mondi (LSE: MNDI). It’s down 48% over five years. There’s no sign of recovery yet, as it’s down 25% over 12 months.

Mondi has struggled as the cost-of-living crisis knocks online shopping, hitting demand for cardboard. The board blames “challenging conditions” and “subdued demand”, as earnings continue to slide. Management is cutting costs and working existing assets harder while waiting for a wider recovery.

Mondi looks reasonably valued with a price-to-earnings ratio near 12, yet with confidence fragile and key markets over-supplied, I think the recovery will take time. The trailing yield of 6.8% may tempt some and I reckon Mondi should come good with a five-year view. It’s worth considering, but demands patience.

Investing moves in cycles and I can see Persimmon and Mondi enjoying brighter days. I imagine that WPP faces a lot more pain first.

The post Thank goodness I didn’t invest in these 3 UK shares 5 years ago! appeared first on The Motley Fool UK.

But those who don’t want to invest in the aerospace and defence group could consider taking a stake in these three stocks. The consensus view of analysts is for each of them to grow faster than Rolls-Royce. Let’s take a closer look.

1. Diageo

Diageo (LSE:DGE), the beer and spirits group, gets a new boss on 1 January 2026. But Sir Dave Lewis, who used to run Tesco, joins at a difficult time. Gen Zers are drinking less than their parents and weight-loss drugs appear to be suppressing the desire for alcohol as well as food.

The group says people are drinking better, not more. To capitalise, it has brands that cater for all price points in the market.

And through clever use of social media, the group’s jewel in the crown, Guinness, appears to be going from strength to strength. One estimate reckons the stout’s worth £14bn on a standalone basis.

Despite its woes, Diageo’s still yielding 4.6% (no guarantees, of course).

Such is his reputation that news of Sir Dave’s appointment lifted the group’s share price by over 5%. Analysts reckon there could be another 26.9% to come over the next year.

2. Mondi

Brokers believe that the Mondi (LSE:MNDI) share price could rise 31.8% by November 2026. But the paper and packaging group’s stock market valuation has tanked recently due to lower paper prices and an over-supply in the industry.

However, these problems appear to be temporary ones. The need for cardboard boxes shows no sign of slowing and I see no reason why the demand/supply imbalance won’t be corrected soon.

Also, the stock currently offers good value with a forward price-to-earnings ratio of 8.5 and a very attractive dividend yield of 7.5%. However, income investors should be cautious as the payout could come under threat if the group’s earnings continue to disappoint.

However, recent cost savings and delayed investment means the group’s well positioned to benefit when market conditions improve.

3. Persimmon

The biggest risk for Persimmon (LSE:PSN) is that the housing market fails to continue its recovery. If interest rates don’t fall or the economy stagnates, the demand for new properties is likely to suffer.

However, net borrowing in September was at its highest level since March, when there was a rush to complete deals ahead of stamp duty changes. Importantly, the actual interest rate on new loans is now at its lowest level since January 2023.

The long-term fundamentals of the UK housing market favour Persimmon. There’s a chronic shortage of new properties and the government wants to streamline the planning process. On the demand side, shareholders will be hoping that first-time buyer incentives are reintroduced as part of this month’s Budget.

Persimmon’s properties are cheaper than its rivals, it owns plenty of building plots and it has no debt. This puts it in a strong position if recent market trends continue and probably explains why analysts reckon the stock will rise 19.4% over the next 12 months.

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