Securing a second income of £10k a year is no easy feat but for loads of UK citizens, it’s well within reach.
According to recent data, approximately five million of us have savings of £100,000 or more. Rather than gathering dust in a low-interest savings account, that money could be put to better use.
Aiming for a £10k second income
There are several reliable UK dividend stocks to consider like Legal & General (LSE: LGEN), British American Tobacco or Schroders. These stocks not only enjoy yields of around 7% but each has a long and reliable history of growth and payments.
£100,000 invested in a portfolio with an average 7% yield would return only £7,000 in the first year. But after five years of reinvesting the dividends, the pot could have grown to £142,000, paying almost £10k a year in dividends.
That is, of course, assuming the average yield held and no dividend cuts were made. That’s why it’s critical to pick stocks with an excellent dividend track record.
Picking reliable dividend stocks
Consider Legal & General. It’s been increasing dividends almost every year since 2009, pausing only briefly in 2021. Its annualised dividend growth in the past 15 years is over 12% — far higher than most stocks.
Recently, the insurer’s financial performance has suffered under a tough economy, but it remains steadfastly dedicated to shareholder returns. Since 2020, revenue has halved and earnings have plummeted, with its net margin now below 1%. With earnings near a five-year low, it’s now paying out seven times more in dividends than it has coming in.
Usually, such a situation would be unsustainable, but Legal & General’s track record suggests otherwise. Historically, the company has endured far worse economic downturns before making cuts, so I’m not worried… yet. However, the longer earnings remain subdued, the higher the risk of a cut. A sudden rise in claims from an unexpected global event would certainly increase the pressure.
Things already look to be improving, reflected by investor confidence that has ramped up the share price 10% this year. This optimism is further backed by the recent purchase of shares by company Chair Sir John Kingman.
Shares to avoid
When identifying dividend shares for a second income strategy, it’s important to think long-term. A high yield might be attractive, but it could also be a sign of underlying problems. Struggling firms sometimes boost their yields to try attract investment. At other times, a high yield is simply the result of a falling share price.
For the best chance of not getting hit by a dividend cut, avoid companies with low cash flow or high debt. The company should have enough earnings to cover payments and then some. It’s also best avoided cyclical sectors such as mining, energy and housebuilding. These industries tend to go through boom-and-bust cycles, which can lead to dividend cuts.
Finally, if company insiders such as employees or board members are selling stock, that’s not a good sign.
Playing it safe
A large sum of money, when invested carefully, can go a long way. While the stock market is certainly more risky than leaving money in the bank, it can also be far more lucrative.
Using tried-and-tested practices to pick the right stocks can significantly reduce this risk — while maximising potential returns.
