There are plenty of options when it comes to making a second income. I could start a side hustle, or become a landlord. But for me, the best way is to buy dividend shares.
It’s relatively hassle-free. The only work I have to do is target the right businesses and ensure they’re performing as they should.
But if I had some cash tucked away and wanted to start making additional money through income stocks, what would I do and buy?
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The average saving amount in the UK is £11,000. So let’s use that as an example. Here’s how I’d go about it.
Due diligence
The first thing I’d do is find stocks that currently pay a handsome dividend yield. I think there are plenty of these sorts of stocks in the FTSE 100.
The average yield of the index is 3.9%. By comparison, the S&P 500’s just 1.4%. Therefore, the Footsie’s generous payouts make it a great place to start.
Aside from finding stocks with high yields, I’d also need to do my due diligence. I’d want to find businesses with a solid record of paying out to investors. While that doesn’t mean this will be the case going forward, as dividends are never guaranteed, it would give me more confidence investing in the stock.
A good example
An example I like (and own) is HSBC (LSE:HSBA). The stock’s kicked off 2024 in great fashion, rising 10.6%. At its current price, it yields a healthy 7%.
What’s more, that’s predicted to rise to nearly 8% by 2026. Last year, it increased its dividend payment from 31 cents per share to 61 cents while initiating a $2bn share buyback scheme, highlighting its willingness to return value to shareholders.
On that note, in its Q1 update, it also announced a special dividend of 21 cents per share following the sale of its banking business in Canada, as well as a fresh $3bn buyback scheme.
Investing comes with risks and one of the largest I see to HSBC at the moment is its investment in China and, more specifically, its property market, which has been volatile.
But I still like the look of HSBC today. The stock looks cheap. It trades on just 7.5 times earnings, below the Footsie average of 11. On top of that, its price-to-book ratio is 0.85, where 1 is considered fair value.
If I was looking to start generating a second income today, it would be stocks like HSBC that I’d target.
A second income
But just how much could I make with my £11,000? Well, taking HSBC’s 7% yield and applying it to my amount would earn me a £770 second income. That’s nowhere near my target.
To reach that, I’d take a few steps. Firstly, I’d reinvest my dividends. Furthermore, I’d add a further £200 monthly contribution.
Compounding at 7%, after 25 years, my £11,000 would generate £15,080 in interest. That works out at around £1,257 a month, which would go a long way in allowing me a more comfortable lifestyle.
