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I think a second income is a great way to supplement my standard salary. If it is enough to cover my daily expenses, I can save a lot at the end of the month.
One way to move toward earning additional income is by purchasing shares of companies that pay dividends.
Naturally, this approach has advantages and disadvantages. The plus side is that it requires almost no time or effort. However, it may take years of regular investments before you start to become profitable, and there is no guarantee that this will be the case. But if you do, it can result in a steady stream of effortless income.
The trick is to choose the right stocks.
Ideally, an income-focused portfolio should include a mix of stocks from various sectors and regions. This helps avoid losses arising from industry-specific risks and localized economic problems.
Home is where the heart is.
An example is the UK house construction company. Taylor Wimpey (LSE: TW.). It has been a reliable income stock of late, increasing annual dividends from 0.7p per share in 2013 to 9.58p in 2023, an annualized growth of 29% per year.
The government's new housing policies could soon increase demand for its services, boosting incomes. When dividend-paying companies enjoy a profitable quarter, they often increase dividends to shareholders. The share price is already up 42.3% in the last 12 months.
Its price-to-earnings (P/E) ratio is still quite low at 23.6. So it may have more room to grow.
However, income is localized and highly dependent on the UK economy. This was most evident during the 2008 financial crisis, when the stock price plummeted 97% in 18 months. If a similar event were to repeat, the price could fall again.
Another big local dividend payer to consider is itvwith a profitability of 6.3%. But let's look at something further.
An international power
With a market capitalization of £60 billion, British American Tobacco (LSE: BATS) is another great dividend stock with a yield of 8.6%. The tobacco giant is a much larger global company than Taylor Wimpey and derives almost half of its revenue from the United States. Europe is its second largest market, with the rest coming from Asia and Africa.
This makes it less prone to fluctuations in a single market.
However, new smoking regulations are putting pressure on tobacco companies to adapt. It has invested capital in transitioning to less harmful next-generation products, such as vaporizers. As a result, it is currently unprofitable and has £40bn of debt.
With next-generation products gaining popularity, analysts expect the company to return to profitability this year. Earnings are expected to grow at a rate of 44% annually in the future.
Another good international dividend payer to consider is HSBCwith a yield of 7%.
The waiting game
With a share portfolio yielding 7% on average, a daily investment of £10 could generate around £255 in dividends after the first year. After 10 years, my pot would have grown to around £63,740, assuming a 5% price appreciation (the FTSE average).
At that point you would be breaking even and earning around £10 a day in dividends. Another eight years and my pot would have reached £200,000, paying me a second income of more than £12,000 a year in dividends, or £33 a day.