I’d spend £5K on these 5 shares to target a £400 second income

Our writer shares a handful of FTSE 100 shares he would happily buy today as a way of building a second income, thanks to their dividends.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smiling white woman holding iPhone with Airpods in ear

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Imagine if you wanted to start building a second income but did not want to work more. What would you do?

For me, one obvious approach would be to invest in income shares. Those are shares that could pay me dividends.

If I had a spare £5,000, I could start doing this today and target an initial annual income of £400. Here is how I would go about it.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Some basic principles to start investing

I would begin by putting my £5,000 into a share-dealing account or Stocks and Shares ISA so I had a vehicle to invest.

An important principle when investing is to reduce the risk of an unfortunate choice by diversifying across a range of shares. With £5,000, I could do this comfortably. I would split the money evenly over five businesses.

As income as my focus, I would not be too concerned about finding companies with strong growth prospects. Instead, I would look for blue-chip companies with businesses I understand that have a proven commercial model. They do not need to be consistently profitable, but my bias would be for firms that have demonstrated an ability to be profitable most years.

As dividends are never guaranteed and past performance is not necessarily a guide to what will happen next, I would not obsess about a company’s dividend yield when trying to build my second income.

Instead, I would study its business and finances to decide whether I felt it looked likely to generate enough profit and free cash flow to pay dividends for years to come.

Five shares I’d buy today

Using those principles, I would put my money into the five companies below.

British American Tobacco has an addictive product and premium brands, giving it pricing power. A decline in cigarette use could hurt profits, however.

Legal & General is a financial services powerhouse that benefits from a strong brand and large customer base. But volatile markets could lead some customers to withdraw funds, hurting profits.

Vodafone has a large telecoms business in Europe and Africa, benefitting from a huge customer base and its extensive network. The high cost of maintaining that network could eat into profits, though.

M&G is a well-known asset manager with operations in over two dozen countries. Its customer base and experience attract me, though continued success partly relies on its fund managers doing well even in difficult markets.

Unilever has a yield of 3.7%, much lower than the other companies above. I also see a risk that a recession could lead to lower sales volumes, as consumers look for cheaper products. But its iconic brands and wide reach give it a big competitive advantage, in my view.

Income ahoy!

The above handful of shares have an average yield slightly above 8%.

That means that, investing £5,000 in them today could hopefully earn me an annual second income of £400.

The five offer me diversification, but all are members of the flagship FTSE 100 index of leading shares.

Dividends are never guaranteed. That said, four of the five raised theirs last year. The fifth (Vodafone) kept its steady and currently yields 9.7%.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won’t want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we’re giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in British American Tobacco P.l.c., Legal & General Group Plc, M&g Plc, and Vodafone Group Public. The Motley Fool UK has recommended British American Tobacco P.l.c., M&g Plc, Unilever Plc, and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Can this FTSE 250 underperformer turn things around in 2025?

After underperforming since its IPO, shares in Dr Martens have finally started to show some life. Is 2025 the year…

Read more »

Investing Articles

Here’s what £20,000 invested in Rolls-Royce shares at the start of 2024 is worth today

2024 was another brilliant year for Rolls-Royce shares, which almost doubled investors' money. Harvey Jones now wonders if the excitement…

Read more »

Investing Articles

Ahead of its merger with Three, is Vodafone’s share price worth a punt?

The Vodafone share price continues to fall despite the firm’s deal to merge with Three being approved. Could this be…

Read more »

Dividend Shares

3 simple passive income investment ideas to consider for 2025

It’s never been easier to generate passive income from the stock market. Here are three straightforward investment strategies to consider…

Read more »

Investing Articles

I was wrong about the IAG share price last year. Should I buy it in 2025?

The IAG share price soared in 2024 and analysts are expecting more of the same in 2025. So should Stephen…

Read more »

Investing Articles

Here’s the dividend forecast for National Grid shares through to 2027

After a volatile 12 months, National Grid shares are expected to provide a dividend yield of 4.8% for the company’s…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Growth Shares

2 exceptional growth funds that beat Scottish Mortgage shares in 2024

Scottish Mortgage shares generated double-digit returns for investors in 2024. But these two growth-focused investment funds did much better.

Read more »

Investing Articles

If a 40-year-old put £500 a month in S&P 500 shares, here’s what they could have by retirement

A regular investment in S&P 500 shares could help a middle-aged person build a million-pound portfolio. Royston Wild explains.

Read more »