A second income can be very helpful for someone trying to make a bit of extra cash on the side. There are plenty of ways to achieve this, with my favourite being dividend shares. So,if someone had a lump sum of £10k that they were looking to maximise the return on, what numbers could be possible?
Finding the right balance
On the face of it, they could simply put all of the money in a stock like the Renewables Infrastructure Group. It has a yield of 10.09%, meaning our investor could expect to receive over £1,000 a year from their lump sum. That’s one of the highest-yielding options across the FTSE 250 and FTSE 100, so it’s a good indication of the maximum one could target.
However, this might not be the most sustainable strategy. If the company cuts its dividend in the future, it could materially affect its income. Based on this, our investor could instead pick a firm with a long history of paying dividends but a much lower yield of 2% or 3%.
The problem with this is it doesn’t maximise the potential income. So in reality, I believe the best way is somewhere in between. Imagine the £10k is split across 10 stocks, with a target yield of around 5%-7%. This provides diversification, so any impact on the portfolio from one company is manageable. It also provides a yield almost double the index average, so it’s still squeezing plenty of juice out of the lemon.
Ultimately, I think a second income around the £500-£700 mark per year is possible from this. Over time, if this money is put back into the stock market, the funds can compound faster, meaning the income could grow even more.
Potential option
The next step is to try and find stocks to include. One example is Aberdeen Group (LSE:ABDN). The company’s core operations revolve around asset management, where it earns fees by investing and overseeing client capital. Like many fund managers, Aberdeen’s revenue model is largely based on assets under management (AUM), meaning the more money it manages and the better it retains clients, the more recurring fee income it can generate.
Over the past year, the stock is up by 26%. Part of this is reflected by the growth in AUM, which hit £556bn in the latest full-year results, up from £511bn the year before. This helped to filter down to an profit before tax of £442m, a sharp jump from £251m in the previous period. Ultimately, this acts to make the dividend payments sustainable. The current dividend yield of 6.23% is within the strategy’s target range.
Looking forward, I think the dividend is sustainable because Aberdeen’s business does not require significant capital investment to operate. The company does not need to build factories or constantly reinvest billions into equipment. Instead, cash generation depends mainly on managing assets efficiently, controlling costs, and keeping clients invested
Of course, Aberdeen isn’t risk-free. Asset management is a crowded industry, with low-cost passive funds putting pressure on more active peers like Aberdeen and their higher fees. But, on balance, I think it’s a good stock to consider.
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Jon Smith has no positions in the shares mentioned.
