One common way to generate a second income is to build up a portfolio of shares that pay dividends.
I do that myself. One of the shares I own as part of my passive income plan sells for pennies.
Penny share with powerful income potential
The share in question is Income and Growth Venture Capital Trust (LSE: IGV).
Like it says on the tin, it is a venture capital trust. So it invests in small and medium-sized businesses it reckons have good growth potential.
When it comes to its own growth, Income and Growth has been a non-performer. The share price is down 11% over the past five years.
So why do I like it?
The answer lies in the other part of the trust’s name: income.
This trust has been a solid dividend payer for years. In those same five years, while the share price has fallen 11%, the company has paid 48p per share in dividends to shareholders.
That is equivalent to around 76% of the current share price.
I think the dividends could keep on coming
Still, as with any share, past performance is not necessarily an indication of what may happen in future.
So, while Income and Growth currently has a dividend yield of 9.5%, that does not automatically mean that £1,000 invested today will earn £95 of dividends next year.
However, I hold the share because I have confidence in its long-term potential when it comes to boosting my second income. The trust aims to pay at least 6p per share in dividends annually. That indeed equates to a 9.5% yield.
Over the past 13 years, the trust has met or exceeded that target every year.
For that to continue, it needs to continue generating cash, whether through dividends from companies in which it has a stake or – more commonly – by selling a shareholding and generating cash.
Exposure to unlisted growth stories
It has been doing a good job of that over the years.
One risk I see at the moment, however, is that it is not a great market in which to be offloading shares in small companies at a good profit. Or, as the trust managers put it in their most recent annual report, the “exit environment remains subdued”.
Still, the trust managers have a good track record of buying into promising companies, holding them for a number of years, and then selling, sometimes at a substantial profit.
There are some duds, of course: that risk goes with the territory of investing in unlisted companies in their growth phase.
But overall, the approach has repeatedly proven to work, underwriting the substantial dividend from from Income and Growth.
That suits me fine, as it adds to my second income. My expectations for share price growth (if any) are modest, but from a dividend perspective, I like this share a lot and have no plans to sell it.
This post was originally published on Motley Fool
