Investors chasing a life-changing passive income have had plenty of joy buying FTSE 100 shares over the years. But purchasing FTSE 250 dividend stocks can also be an effective way of building a second income.
Recently-relegated Footsie stock Hargreaves Lansdown (LSE:HL) is one such share on my radar today. For the current financial year (to June 2024) its dividend yield sits at a mighty 6.3%.
Things get even better for fiscal 2025 too. Then the financial services firm’s dividend yield marches to 6.6%.
Here’s how the FTSE 250 company could make me a four-figure second income in the new year.
Solid dividend growth
Hargreaves Lansdown is the UK’s largest investment platform with 1.8m customers and a whopping £135bn of assets under administration. Its market-cap has dropped more recently (to £3.5bn currently) as pressure on retail investors’ budgets has impacted trading volumes and its share price has fallen.
The company has remained a reliable dividend grower despite these recent pressures however. Over the past five years the annual dividend has risen 23%. Hargreaves even continued to raise shareholder rewards during the pandemic, unlike most other UK income shares.
A £1,000 passive income
Based on broker forecasts for this year, investors could make a yearly second income of £1,000 by buying around £15,900 worth of Hargreaves Lansdown shares.
Even if I don’t have that sort of cash to spend today, that four-figure sum is still achievable in the near term, thanks to that 6.3% forward yield. Purchasing 14 shares a week — or around 61 shares a month (worth £442 at the current price of 724p) — would allow me to hit that magic £1k annual dividend income goal after three years.
But that’s assuming dividends stay unchanged over the period. It’s possible I could hit my target even sooner. After all, analysts are expecting shareholder payouts to continue increasing over the short term, as I mentioned earlier.
Why I’d buy
It’s important to remember that dividends are never guaranteed. In the case of Hargreaves Lansdown, continued weakness in trading volumes could put current dividend forecasts in jeopardy.
For fiscal 2024, the predicted dividend is covered just 1.4 times by anticipated earnings. This could leave very little wriggle room for the FTSE 250 firm to meet broker predictions if profits come in lower than expected (investors should ideally seek dividend cover of at least 2 times).
That said, a strong balance sheet still leaves Hargreaves Lansdown in good shape to meet this year’s dividend forecast over the next two years, at least. Its net cash position stood at £503.3m as of June.
A positive long-term market outlook should also provide the firm with the confidence (and the means) to keep growing dividends in 2024, and probably beyond too. Retail investment is soaring in the UK as people become more financially literate and planning for retirement takes on increased importance.
I think the sharp fall in Hargreaves Lansdown’s share price in 2023 is a great dip opportunity for value investors like me. I’ll be looking to add it to my own portfolio for dividend income when I next have cash to invest.
