£20,000 in savings? Here’s how that can be used to target a second £2,653 in income
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Have you ever wondered if dividends from stocks can really produce a profitable secondary income?
Of course they can, but whether they do it depends on several factors: how much money one invests, for how long, and how much the dividend yield is. For example, what kind of second income can someone make with a sum of £20,000?
Taking a long-term view
As I just said, timing is important. I like the long-term approach to investing. That gives businesses time to prove themselves and, hopefully, to accumulate benefits.
There are several ways to earn a secondary income. Another would be to invest £20k and start reducing dividends as soon as they arrive. With a yield of, say, 5%, that should produce a second annual income of £1,000.
But another way is what is known as consolidation: initially reinvesting shares. Then, at some point, the dividends can be converted to be used as income instead of continuing to compound.
For example, after 10 years, with a compound annual growth rate of 5%, the portfolio should be worth around £32,578. With a dividend yield of 5%, that should generate £1,628 a year in secondary income.
Or to continue compounding for another 10 years instead, the portfolio should be over £53,000. With a dividend yield of 5%, that would generate a secondary income of £2,653 per year.
Getting started
Diversification is a simple but important risk management strategy: £20k is enough to spread over many stocks.
Transaction fees and commissions can also swallow money, so an experienced investor should weigh their options when it comes to choosing a brokerage account or a Stocks and Shares ISA.
Great dividend payer
I mentioned a target yield of 5% as an example. Actually that is much bigger than the current one FTSE 100 2.9% yield. But I think it’s still possible as long as you stick with quality blue-chip companies.
One dividend that I think investors should consider British American cigars (LSE: BATS). The company has a global footprint, a strong distribution network and stables of premium products like Lucky Strike that gives it pricing power.
Raising prices can help offset declining sales volumes but only so far, if prices fall badly enough.
paid a dividend of 5.6 %. The expected yield is quite high, as British American intends to continue increasing its dividend per share annually, as it has done for decades.
The benefits are not guaranteed though – and the decline in cigarette sales is a risk. In addition, the company lost volume share in the top markets last year. As the size of the market shrinks, maintaining or growing the share can be better in practice.
Meanwhile, the company is also growing its smokeless business while tobacco consumption is declining.
From an ethical perspective, not all investors are comfortable with tobacco stocks. Personally, I think the share has continued dividend potential.
