Earning a second income can be done in different ways. One is to invest in a diversified portfolio of proven blue-chip shares that pay dividends.
Doing that in the way I illustrate below, an investor starting with £20k today could realistically hope to have a second income of £278 a month after 15 years – and a sizeable share portfolio to boot.
Here’s where the money comes from
To start, I will explain the maths. That £278 a month is presuming a 6.5% average dividend yield. Compounding £20K at 6.5% annually would mean that after 15 years, the portfolio would be worth around £51,436. At a yield of 6.5% that ought to generate £278 per month.
Now, 6.5% is above the FTSE 100 average yield, which stands at around 3.6%. My compound annual growth rate could include some capital growth, though of course shares can fall in value as well as rise. It pays to choose carefully.
However, in this example I am presuming 6.5% compound annual growth from dividends alone. It is well above the current FTSE 100 average but attainable in today’s market from quite a few proven blue-chip dividend shares.
The sorts of shares to buy – and where to find them
As an example, one share I think investors hunting for a second income should consider is Phoenix (LSE: PHNX).
The FTSE 100 insurer blows past my 6.5% average yield target, currently offering 10.3%. In fact, that makes it the highest-yielding of any FTSE 100 share.
Yield alone is not the thing to focus on first however. After all, dividends are never guaranteed to last.
Phoenix does face risks, like any company. For example, it has a mortgage book. So if the property market plunges and valuations in reality do not reflect Phoenix’s assumption, it could suffer a loss as it writes down loan values.
But on balance, I see a lot to like about Phoenix. It is not a household name but it owns some, such as Standard Life. Phoenix aims to be the UK’s leading retirement savings and income business — and already has around 12m clients.
The business has a proven model for cash generation and in the first half of last year generated £954m in cash. That has helped fund a healthy and growing dividend.
How to get the ball rolling
Of course, dreaming of a second income and thinking about what shares could provide it is one thing. But not a single penny of dividends will roll in unless an investor actually buys some shares!
For that, setting up a share-dealing account or Stocks and Shares ISA would provide a home where the £20k could be parked now, ready to be invested when the right shares are found.
This post was originally published on Motley Fool
