Wouldn’t we all like a second income, especially one we didn’t have to work for?
I certainly would, and I’m trying to get one by going for a Stocks and Shares ISA and holding for as long as I can.
But which shares would I buy? Starting now, I might go for the following:
| Stock | Recent price |
1-year change |
5-year change |
Forecast P/E |
Forecast dividend |
| Barclays | 155p | -1.5% | -19% | 4.8 | 4.4% |
| Taylor Wimpey | 115p | -6.9% | -34% | 13 | 8.1% |
| Legal & General | 236p | -8.1% | -10% | 8.8 | 8.3% |
| City of London Investment Trust | 404p | -1.4% | -6.2% | 18 | 5.2% |
| Scottish Mortgage Investment Trust | 707p | -15% | +29% | n/a | n/a |
Strange choice?
Let me start with what might look like the strangest choice first. Scottish Mortgage doesn’t invest for dividends, so what’s it doing in an income portfolio?
Well, I don’t want to take the income right now. In fact, any dividends I earn from my shares these days go right back towards new stock purchases.
By the time I come to take the income, all that will matter will be total returns. And I reckon I see plenty of growth potential in the US tech stocks that Scottish Mortgage holds.
And if I get capital growth rather than income, it’ll save me the bother of buying more shares.
Long-term income
When the time comes to draw down income, I’ll probably sell Scottish Mortgage and put the cash somewhere else.
And that’s where City of London comes in. It does invest for income, buying lots of top quality FTSE 100 stocks.
Its 5.2% dividend yield isn’t among the biggest. But reliability will be important to me in the long run. And this one has raised its dividend for 57 years in a row.
I expect to buy more in the years ahead.
Cheap sectors
The other three come from the sectors I think are currently the most undervalued.
Clearly, there’s risk in the finance world and in property at the moment. And that’s helping hold back banks, insurance stocks and house builders.
But it happens all the time. We get down spells when everyone sells the shares, then bull runs when people buy them.
And that has to be the wrong way to do it. We want to buy them when they’re down, right?
I must stress though, that I’d never buy a stock just because it’s cheap. No, it has to be a company that I rate as high quality, with defensive traits and good long-term cash flow.
Buy them?
So will I buy these five? Well, I already bought two. And I also went for a different bank, insurer, and housebuilder. So I already have these sectors well covered. But if I think I have enough diversification, I might still double up on all three.
Now I haven’t really looked at the individual risks here. So before buying any stock, we should do our own research and only buy if we’re happy with the risks. Never just do what someone on the internet says.
This post was originally published on Motley Fool
