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Owning blue chip stocks that pay dividends is one way to generate a second income without working for it.
That’s what I plan to do next year. By following the plan below, I think I can aim to generate an income of over £2,400 next year – and hopefully each year beyond that.
The first step: choosing an investment vehicle
My first step is to decide which vehicle I will use to invest.
That may involve choosing a Stocks and Shares ISA or share trading account that best suits my circumstances and needs (everyone is different).
Although the standard annual ISA allowance is £20k, I can use that amount until the first week of April when the annual allowance starts. So that would give me an allowance of £40k for the next calendar year, plus any existing funds I have. planted. Also, I’m not limited to investing with an ISA – even if I can access more money, I can buy shares in a trading account, albeit without the potential tax benefits of an ISA.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
I will target an average yield of 7%. This means I will need to invest £35k to aim for my £2,400+ second income target.
Step two: stock selection
That £35k is enough to spread over many shares.
Diversification in that way means that if one share disappoints me – for example, by canceling the dividend – then all my eggs are not in one basket. No dividend is guaranteed to last, although it is plentiful.
The kind of dividend I would love to own (and in fact I do). FTSE 100 financial services provider Legal & General (LSE: LGEN).
As revealed at an investor event this week, its cash-generating capacity is so strong that it is weighing the possibility of increasing its share buyback. That comes on top of a progressive dividend policy that has seen the dividend per share rise every year since the financial crisis, bar one (when it was held down).
With its 8.6% yield, I see it as having the potential to be a solid contributor to my secondary income. Legal & General has a proven business model, a large client base, a strong brand, and a focus on the large retirement market and is likely to remain so.
Another risk I see is a sudden correction in the stock market leading to losses, as investments are revised and policyholders may cash out. As a long-term investor, Legal & General is the type of income machine I’m happy to own.
Step three: get out of action
Shall I continue to hold?
Companies can change suddenly, or gradually, in ways that affect the investment climate for better or worse.
So, even though I’m an investor rather than a trader, that doesn’t mean I don’t neglect my portfolio for years at a time. Instead, I will pay attention to see if something happens that makes me decide to sell certain stocks or buy others.
In the meantime, I’m hoping to earn my second income of over £2,400 a year – from next year!
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