When it comes to building a second income stream, there are a lot of options to explore. However, my personal favourite is leveraging the power of dividend shares. After all, owning income stocks allows investors to enjoy a steady stream of cash without having to lift a finger.
This is especially true in the UK since the London Stock Exchange is home to a vast collection of dividend-paying enterprises. And many of them offer generous dividend policies. Among them, BT Group (LSE:BT.A) continues to be a favourite for both retail and professional portfolios. But how much could I earn by becoming an owner of this enterprise? And what would be the cost?
The price of earning £2,000
Today, BT shares are paying out a dividend of 8p per share. Therefore, if my target income is £2,000 a year, I’d need to own around 25,000 shares. Taking the group’s current share price of around 130p, this would place the investment cost at around £32,500.
Obviously, that’s hardly a small sum of capital. But fortunately, it’s not as far out of reach as it seems on the surface. Investing is a long-term journey. And given sufficient time, regularly investing a small lump sum each month can eventually build up to this position.
For example, if I were to invest £500 each month at BT’s 6.15% dividend yield, I’d reach my goal within around four and a half years. And that’s not including any extra gains I would earn from the stock price rising. And If I continued this strategy for a total of 10 years, my second income stream would grow to just over £5,000.
However, as exciting as this prospect sounds, we’re ignoring a critically important factor – risk.
Managing risk and expectations
Despite being the UK’s telecommunications industry leader, BT Group isn’t a perfect enterprise. In fact, it’s been quite the opposite over the last decade. Years of mismanagement have resulted in an unimpressive amount of debt building up on the balance sheet while earnings have steadily suffered. The effect of this is apparent when looking at the firm’s stock chart, which shows an almost 70% decline since June 2014.
Fortunately, it seems action’s finally being taken. Under new leadership, management’s attempting to undo the damage. So far, £3bn of annualised savings have been delivered a year ahead of schedule. And CEO Allison Kirkby has announced a new target of eliminating another £3bn in expenses by 2029.
At the same time, capital expenditures for its fibre broadband rollout might have reached its peak, indicating a potential boost to free cash flow as we move into 2025 and beyond. That’s especially good news for dividends since this is ultimately what funds them.
However, while progress is encouraging, the balance sheet still has weak spots, especially in regards to its £4.8bn pension deficit. Should cost savings fail to materialise as planned, or expenses continue to rise, dividends could be put on the chopping block, compromising investors’ passive income.
As such, when seeking a second income in the stock market, investors need to maintain a diversified position. That way, should one firm fail to deliver on expectations, the others can offset the impact.
This post was originally published on Motley Fool
