Why investors should buy stocks now for a second income!

Dr James Fox explains why the recent stock market correction provides investors with an opportunity to create a high-yield portfolio and second income.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young female business analyst looking at a graph chart while working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Many investors buy stocks and shares to create a second income. We can achieve this by buying dividend stocks — companies rewarding shareholders with regular payments — and using the money to help fund our lives.

But in recent weeks, the stock market has pushed downwards, sparked by concern about banks‘ unrealised losses on bonds. So why is this a good time to buy for a second income? Let’s take a closer look.

Buy when others are fearful

Legendary investor Warren Buffett tells us that we should invest when others are fearful. To be precise, he once said it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”

Should you invest £1,000 in Lloyds Banking Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?

See the 6 stocks

Right now, we’re seeing investors and institutions pull back from the market, but that’s not a bad thing because it creates opportunities. With the FTSE 100 down 7% over the month — flat over 12 months — and some banking stocks down 20% over the month, this looks like a great time to buy.

Naturally, it’s always preferable to buy at lower prices even if we are investing for a very long period of time. This allows us to, hopefully, achieve higher returns over the course of the investment.

Dividend yields

Dividend yields fall when share prices go up, and go up when share prices fall — assuming dividend payments remain constant. So in the current environment, I can hope to find inflated dividend yields as share prices fall.

My first point of call is banking stocks, where investors have been most fearful. The thing is, I think this sector pullback is entirely unwarranted. These institutions are performing well, they’re highly regulated, and the quality of their deposits is not problematic.

Let’s take Lloyds which now offers investors a 5% dividend yield after the share price fell 12% over the past month — it’s now down 7% over a year.

The forward yield is very attractive too, with City analysts forecasting a full-year dividend of 2.4p in 2022, rising to 2.7p and 3p in 2023 and 2024 respectively. Using the 2024 dividend forecast, we can assume a forward dividend yield of 6.4%.

It’s also worth noting that these forecast dividend payments would likely be easily affordable if overall performance remains constant, or improves. The dividend coverage ratio in 2021 was 3.8. That means earnings could cover stated dividends 3.8 times — that’s far above the benchmark for a healthy yield of two.

Maximising returns

I’m taking this opportunity to maximise my portfolio’s capacity to deliver a supercharged second income. If I invest in stocks that have fallen 10%, on average, I can essentially create a portfolio that delivers around 10th more in dividends than it would have done a month ago.

As such, I’m also buying more stocks like Hargreaves Lansdown, in addition to banking stocks. Hargreaves has fallen 10%, and now offers a 5% yield.

Of course, there’s no guarantee that the market won’t fall further, but I think valuations are pretty low already right now. For me, now’s a good time to buy.

Should you invest £1,000 in Lloyds Banking Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in Hargreaves Lansdown Plc and Lloyds Banking Group Plc. The Motley Fool UK has recommended HSBC Holdings, Hargreaves Lansdown Plc, and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »