It will likely take a few years to turn £10,000 into a four-figure second income. But by adopting three simple rules, I’d hope to get there quicker than you might think.
The rules
My first rule is that the stocks must be in the FTSE 350. These are the 350 biggest UK listed companies and, theoretically, the least likely to fail. Their earnings should be stable and predictable.
Second, they mustn’t have cut their dividend during the past three financial years. There’s little point buying a stock for its high payout only for it to be reduced soon after. I reckon this period is long enough to give me comfort that the present level of shareholder returns is sustainable.
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Finally, in the short term, I’d have to reinvest any dividends received. I wouldn’t withdraw any cash until my £10,000 had grown sufficiently to give me a decent income.
High five
Here are my chosen stocks.
Some mightn’t like the fact that Diversified Energy Company operates UK gas and oil fields. But with an expected payout this year of 17.5 cents, its shares are presently yielding 15.8%. The company has a hedging strategy in place to help achieve a consistent margin.
Foresight Solar Fund has a good track record of growing its dividend (over 8% in four years) and its stock is currently returning 6.8%. The fund owns and operates PV and battery storage assets. Although the global market is expected to grow by more than 50% by 2030, the industry is sensitive to changes in government legislation. Subsidies and incentives, which underpin the fund’s profitability, could be reduced or withdrawn.
Phoenix Group has been steadily increasing its dividend in recent years. The pensions and savings business is expected to pay 52.5p a share this year, giving a yield of 9.4%. One area of concern I have is its assets under administration. These fell by 16% last year. But the company’s boss doesn’t seem too worried, and is expecting future growth to come from both existing customers and acquisitions.
Vodafone‘s problems are well documented. Stagnant sales and declining margins have afflicted the company for several years. But it recently appointed a new chief executive who’s acknowledged that the telecoms giant needs to change. A huge cost-cutting exercise is intended to make the business more streamlined. Its stock is currently returning 10%.
With the majority of its earnings coming from Asia, I think HSBC is likely to benefit from the expected economic recovery in the region. The bank is hoping to improve its return on capital employed from 9.9% in 2022, to 12% this year. However, its loan book — particularly in China — is vulnerable to a downturn in the commercial property market. The bank’s stock is presently yielding 5.3%.
Possible outcome
Assuming no growth in the share prices or dividends of the five, within 15 years my £10,000 could grow to £43,813.
At this point I could be earning a second income of £5,007.
Of course, history doesn’t necessarily repeat itself. And dividends are never guaranteed. But my chosen five are solid companies with a history of offering generous returns to shareholders.
Unfortunately I don’t have £10,000 available to invest. But when I do, I’m going to consider buying these stocks to help boost my income.
