Generating a second income by investing in high-yielding stocks has always appealed to me. Even more so recently, as the FTSE 100 is at the same level now as it was in March 2017.
This has limited the range of opportunities for gains from share price appreciation across the index. But it has also boosted dividend returns in several notable cases, given that yields rise as share prices fall.
Recently, two standout opportunities to generate a second income have caught my eye. As financial sector companies, a risk for both stocks is that the cost-of-living crisis deters new client business. An additional risk is another global financial crisis at some point.
Should you invest £1,000 in M&G right now?
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Phoenix Group Holdings
Phoenix Group Holdings (LSE: PHNX) is a hidden gem in the FTSE 100, in my view. It is not a well-known name, but several of its brands are, including Standard Life, Pearl Assurance, and Sun Life.
Overall, its core business looks very solid. In its 2022 results, it announced a 1.2% rise in adjusted operating profit to £1.25bn.
It also recorded a Solvency II ratio — measuring shareholder protection against company insolvency — of 236% in the year. This compares to the 100% ratio that meets the statutory requirements for UK insurance companies.
In 2022, its dividend was 50.8p per share. Given the current share price of £5.08, this gives a yield of 10% — one of the FTSE 100’s highest.
This was not a one-off high payment, though. In 2021, it paid 48.9p (7.5%), and in 2020 it was 47.5p (6.8%).
If I invested £10,000 in the stock now, I should make £1,000 this year in second income from it. If such a payout level remained in place for 10 years, then my £10,000 investment would have added another £10,000.
M&G
M&G’s (LSE: MNG) 2022 results were strong as well. They showed operating capital of £821m, with improved underlying capital generation of £628m.
It also maintained a Shareholder Solvency II coverage ratio of 199% for the year. According to its Q1 update, £1bn of net inflows went into its wholesale asset management business over the quarter. This was up £0.3bn from Q1 2022.
In 2022, it declared a total payout of 19.6p. Based on the current share price of £1.86, this gives an annual yield of 10.5%.
Again, this high payout was not a flash-in-the-pan. In 2021, it paid 18.3p to yield 9.2%, and the same yield was paid in 2020 (on an 18.23p dividend).
So if I invested £10,000 in this stock, I would make £1,050 this year in second income from it. If such a payout level remained in place for 10 years, then my £10,000 investment would have added another £10,500.
Together then, these two stocks should yield £2,050 per year in second income for me. This would mean that over 10 years, I would have made another £20,500 to add to my £20,000 total investment.
This would not include further gains from any reinvestment of dividends or share price appreciation. It would also not account for any tax liabilities or share price falls, of course.
I already have high-yielding holdings in the UK financial sector of the FTSE 100. If I did not, then I would buy both stocks now for their enormous second income potential.
