Bagging a second income through regular dividends is one of my biggest investment aims.
It’s entirely possible too, in my view. However, there are some careful steps I’d follow if I were attempting that today.
Let me break down my approach.
What I’d do
Let’s say I have £15K tucked away, and I want to make it work to create an additional income.
First, I need to ensure I’m making this money work as hard as possible, and pay as least tax as possible. For me, a Stocks and Shares ISA is the perfect investment vehicle.
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.
Next, I need to tackle arguably the trickiest part, which is stock picking. I’m looking for the best stocks with the potential to provide regular, and above-average, yields to maximise my pot.
Finally, I would look to top up my £15K with £200 from my primary income, wages, to help boost my end amount.
To summarise then, £15K, along with £200 per month, invested in my ISA, into approximately 5-10 dividend stocks, would be my goal. If I aim for a rate of return of 8%, after 25 years, I’d be left with £300,307.
For me to enjoy this, I’m going to draw down 6% annually. This equates to £18,018. Splitting that into a daily figure would leave me with £49 per day.
From a risk perspective, the biggest one is that dividends are never guaranteed. Plus, all stocks come with individual risks that could hurt earnings and returns. Finally, I’m looking to achieve an 8% rate of return. However, I could be left with less, which would hurt my end amount, and daily additional income amount for me to enjoy.
One type of stock I’d buy
If I was following such a plan today, housebuilder Taylor Wimpey (LSE: TW.) is the type of stock I’d snap up in a heartbeat.
It hasn’t been an easy time for housebuilders since economic volatility began. Rampant inflation and higher interest rates have hurt margins, completions, sales, and overall performance. These are ongoing issues that I’ll keep an eye on as I believe they could potentially hurt future earnings and potentially even dividends.
On the other side of the coin, there’s lots to like about Taylor Wimpey, and the housebuilding industry too. With a new Labour government in place with ambitious plans, the need to address the housing imbalance in the UK is more prevalent than ever. This could translate into future earnings and returns for the business and sector as a whole, for years to come.
It’s hard to ignore Taylor’s wide presence and market position, which puts it in a good place to benefit from increasing sentiment. Plus, with inflation levels coming down – at least for now – margins could get better. Furthermore, if the Bank of England (BoE) begins to cut interest rates, buying levels could spike once more.
From a fundamental view, the shares offer a dividend yield of 6.1%. Plus, they trade on a price-to-earnings ratio of 15, which is decent value for money to me.
This post was originally published on Motley Fool
