Generating a significant second income has always seemed like a wise idea to me. And the best way of doing this, I have found, is by investing in high-quality, high-dividend-paying stocks.
The FTSE 100 has an abundance of such stocks, with several paying very high dividends indeed.
My current preferences for a high-yield-only portfolio include NatWest (13.4% yield), M&G (9.9%), Phoenix Group Holdings (9.8%), and Glencore (9.4%). The average yield of the four is 10.6%.
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All look very solid companies to me, and their diverse business mix would help to mitigate investment risk. If I did not have similar stocks in long-established portfolios then I would very happily buy all four now.
Dividend reinvestment miracle
Those in very lucrative jobs for a few years might have sizeable sums in their bank accounts. Just over £113,000 of that at a 10.6% yield would provide around £1,000 per month in second income.
However, for the many people who do not have that head-start, the same result can be achieved over time.
Saving just £11 per day over five years would add up to £20,000. And I’d invest it via a Stocks and Shares ISA as this would be the most tax-efficient way for me to put my money to work.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
I would buy £5,000 each of my four targeted high-yield shares, to further diversify the risk over the portfolio. And I would keep saving in my ISA, with four or five other different high-yielding shares. This would allow me to mitigate any investment risks linked to a small portfolio.
After just over 18 years at a yield of 10.6% — if I reinvested all my dividends — I would have £113,207. This should give me my second income of £1,000 per month.
Of course, this assumes that the average of the four shares stays at around 10.6%. It might turn out to be higher or a little/a lot lower than that.
Additional FTSE 100 bump
On the other hand, these returns do not reflect any rise in the share prices of the four stocks.
From the start of the FTSE 100 in 1984 to the end of 2022, its overall price return was 645.2%. This equates to 5.3% on an annualised basis.
Factoring this into the mix, I could be making £1,000 per month in second income after just 10 years.
If I decided to delay taking this income for whatever reason, then the returns would continue to grow dramatically.
After 30 years, on reinvested dividends alone, my 10.6%-yielding portfolio could be worth £410,850. This would give me a second income of £3,281 per month – or £39,376 per year. But I have to accept that some of my picks could underperform.
That said, with the historical average FTSE 100 price return factored in, I might have a portfolio worth £1,673,143 after 30 years! Or a second income of £19,127 per month and £229,533 a year. That is still a nice amount even taking into account the big impact inflation would have on it.
And all this from a start of saving just £11 per day.
