I love the idea of having a second income stream to boost my bank account. I’m not so keen on the idea of having to work for it. But help is afoot with the help of dividend-paying UK shares.
It’s not a completely free lunch. Setting up a share portfolio and filling it with income stocks requires effort at the beginning. But after that, it’s possible to sit back and watch the dividends roll in. I’ve been doing it for years.
Want a quick way to start earning passive income with just £9,999? Here are three steps that could give you a large and reliable dividend stream not just for summer, but for life.
1. Take the ISA route
Building a second income doesn’t just come down to what shares you buy. It also depends on how you invest in those dividend stocks.
What I’m talking about is trading the stock market in a tax-efficient Stocks and Shares ISA. The benefit? Not a single penny is taken from your passive income by HMRC.
With a £9,999 lump sum invested in 7%-yielding shares, you’d receive just under £700 in dividends. Now let’s say you’re a higher-rate taxpayer. After taxes, you’ll have only £632 in your pocket. That difference will likely compound significantly over time as your portfolio grows, too.
With protection from capital gains tax, too, using a Stocks and Shares ISA is a no brainer in my view.
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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
2. High-yield opportunities
Roughly 60% of shares on London’s stock market pay dividends today. A great many of these pay dividends at mid-to-high single digit percentages, too. Selecting these can make a noticeable difference to your passive income.
If you were to invest your £9,999 ISA in a FTSE 100-tracking fund, you’d generate a second income of just £310, give or take a few pence. That’s based on the blue-chip index’s current yield of 3.1%. And it’s much less than you’d make with 7%-yielding shares in our example above.
Here’s the thing, though. Some companies with higher dividend yields can find it hard to sustain these market-beating payouts. But investors can get around this with a simple trick…
3. Diversifying for a second income
Holding a variety of shares reduces the risk of any one company cutting dividends and damaging your income stream. This can be achieved easily with investment trusts like Henderson Far East Income (LSE:HFEL).
These vehicles pool investors’ cash across hundreds of companies at a stroke. This particular one holds 68 different shares across many industries. Its dividend yield today is an enormous 9.6%.
That might look unsustainable at first. You may also think the trust’s focus on just Asian equities leaves payouts vulnerable in the event of a downturn, too. They’re fair comments, but the trust’s record — it’s raised dividends for 18 straight years — suggests more resilience than meets the eye.
For this reason, I think investing £9,999 here for a second income is something to consider. But bear in mind you can also achieve excellent diversification by building your own portfolio of dividend shares.
What income stock do we like better than Henderson Far East Income right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Royston Wild does not hold any positions in the companies mentioned.
