There are plenty of ways to earn a second income. I could take up another job, go down the buy-to-let route or, my personal favourite, investing.
Investing may sound daunting to many. However, there’s a wealth of resources nowadays, both online and offline, that can help us all become better investors.
And earning a second income from investing can be simpler than many people anticipate. The obvious way is buying dividend-paying stocks, and taking the dividends as a reward.
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Diversified portfolio
If I were investing for a second income, I’d want a diversified portfolio. That’s because creating one enhances the stability and potential returns of a second income.
Beyond dividend-paying stocks, allocating investments across various asset classes like bonds, real estate, and mutual funds mitigates risk.
When it comes to stocks, diversification is very important. That’s because dividends are by no mean guaranteed. While dividends provide an attractive income source, the variability in payouts necessitates a cautious approach.
A well-diversified stock portfolio not only hedges against potential dividend fluctuations but also strengthens the overall resilience of an investment strategy, fostering long-term financial success.
So if I were investing for a second income, I’d want a diversified portfolio. However, today I’m looking at how many Lloyds (LSE:LLOY) shares I’d need to earn £2,000 a year in passive income. Ideally, this would be part of a diversified portfolio.
Lloyds
Lloyds is by no means a dividend giant. At this moment, Lloyds offers a 5.2% dividend yield, which is certainly large but by no means the biggest on the index. Insurance companies such as Legal & General and Phoenix Group offer much greater dividend yields.
So I’d currently need £40,000 of Lloyds shares in order to generate just over £2,000 a year in passive income.
And thankfully, the dividend would well supported by earnings. This provides some degree of predictably and security.
In 2022, the bank’s dividend was covered 3.04 times by earnings — well above the benchmark two times. In 2023, that coverage ratio is likely to be higher as earnings have been particularly strong.
It’s also worth bearing in mind that Lloyds’s dividend is expected to grow. City analysts see the dividend appreciating again to 2.8p per share in 2023, from 2.4p in 2022. Dividends of 3.2p per share for 2024 and 3.6p for 2025 are predicted.
So using the current share price, the forward dividend yield for 2025 would be 7.8%. In turn, that means I’d need just £26,000 of Lloyds shares for a £2,000 second income in 2025.
Personally, I believe Lloyds is a very strong investment opportunity and it features heavily in my portfolio. While the net interest margin might be narrowing, there should be further tailwinds as interest rates fall.
With falling interest rates, the bank’s hedging strategy should prolong some of the positive impact of higher rates. This is achieved by buying bonds and other fixed income vehicles at higher rates.
Concurrently, we should see impairment charges fall as the risk of defaults declines.
