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When considering the potential investment returns on offer for a second income, I always set the Cash ISA as the benchmark. Currently, the best easy access rate I can find is 5.1%. Given that the risk of capital loss is low, alternatives such as dividends need to pay me a higher yield, given the volatility of share prices. Based on the current market, I think I might be able to achieve a 10% yield. Here’s the low down.
Harnessing the power of diversity
It may surprise some to know that there are currently five stocks in any FTSE 100 or FTSE 250 paid a 10% dividend. I would simply invest in these options and call it a day. However, the five income stocks in the portfolio are less diversified. If one of those five decides to cut the dividend, my income will drop by 20%.
After all, we’re talking about ultra-high yield dividend stocks here. Risk is higher than companies with low yield. So, I want to try and add more to the pot. This is not impossible and can actually be done easily.
For example, Ithaca Energy paid a dividend of 16.72 %. I TwentyFour Income Fund (LSE:TFIF) has a yield of 9.33%. Even though this is below the 10% limit, if I invest an equal amount in both stocks, my average yield is 13.03%.
Therefore, I can build my portfolio using the same companies and still have an average yield of 10% even though some stocks have yields below my goals.
A candidate for a rival
As for stocks I would look to invest in if I followed this strategy, the TwentyFour Income Fund would definitely be on the list.
I can use the stock as a sustainable dividend payer. It has a strong track record of consistent payments over several years. It usually pays out quarterly, which I think is fine as it avoids me having to wait a whole year to get paid.
The fund invests primarily in asset-backed securities. As the name suggests, these are financial products with some form of protection attached. For example, a mortgage is a security backed by an asset. The owner of the loan receives interest payments, but also has a tangible property as an asset in case the borrower defaults.
By managing high-yielding securities, TwentyFour can generate good levels of income that can be paid out to shareholders on a regular basis. The stock price should reflect the overall value of the portfolio. Over the past year, the stock is up 8%.
As a risk, the company has exposure to areas such as student loans and credit card debt. There is a high chance of automation so the company needs to choose carefully what to invest in.
Measuring everything
I wouldn’t say this 10% average portfolio is a low-risk idea. But I think it shows that with some thought and research, I can make my money work harder than just putting it into a Cash ISA.
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