No savings for 50? Here are the stocks I will buy to aim for a second income of £4,037 when I retire

Earning an income does not require a lot of savings. Investing £250 a month in shares can generate a second income of £4,037 over 15 years.

That means an average annual return of 6%. And although there are no guarantees, I think it is very possible for investors who are willing to persevere through volatile times in the stock market.

Dividends

I think one of the best ways to generate extra income is to buy shares in companies that distribute their earnings as dividends. This is especially true with falling interest rates in the UK.

Savers in the UK have been getting decent returns for keeping their money in cash lately. But as the Bank of England stops worrying about inflation and starts focusing on growth, that will end.

That could mean lower returns for savers holding on to their money. In the stock market however, lower interest rates can mean higher business profits – and bigger profits as a result.

If that happens, I would expect share prices to rise, which means dividend yields will fall. But I think investors have a chance to take advantage of attractive opportunities before this happens.

Basic Health Structures

There are different ways to aim for a 6% annual return. The most straightforward is to buy a stock like Basic Health Structures (LSE:PHP) paid a dividend of 6.5 %.

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If the company continues to pay its dividend, investors who buy the stock today will receive 6.5% per year in income regardless of what happens to interest rates. But will it keep that advantage?

There’s a good chance it will – the company leases the GP surgery to the NHS, so the chance of unpaid rent is low. But the firm’s high debt levels could be dangerous in the next few years.

That’s where lower interest rates can help. If the cost of servicing its debt does not outweigh the firm’s profits, Primary Health Properties could be a long-term income stock.

Games Workshop

Another way is to buy shares in a business that does not offer a 6% yield at today’s prices, but can increase its profits over time. Games Workshop‘s (LSE:GAW) is a good example.

The current yield is only about 4%, but the dividend has been growing for the past 10 years. And if it keeps growing at 7% per year, the average annual return for the next 15 years will be more than 6%.

The US – where Games Workshop generates most of its revenue – is facing some challenges at the moment. And that means there is a real risk of a slowdown in income growth.

Since 2014, however, the company has grown its dividends by 23% per year on average. That means it will take a bit of a slowdown for it to fail to achieve 7% annual growth going forward.

No savings? No problem!

Approaching retirement with no savings can seem like a daunting prospect. But 15 years is still plenty of time to build an investment portfolio that can generate a reasonable income.

By putting aside £250 each month and investing it in shares, a second income of £4,037 can be achieved. I will start today by buying shares in Primary Health Properties and Games Workshop.