I’d aim for an annual second income of £34k with high-yield dividend stocks

I’m looking for the best way to start earning a second income with very little effort. Is it by investing a large sum into high-yield dividend stocks?

| More on:

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.

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.

There are several strategies when it comes to investing for a second income. Some aim for slow-but-reliable gains over a long period. Others aim for high returns from undervalued shares with growth potential.

I think buying stocks with high yields and reinvesting the dividends to compound the returns is a good strategy. But while some of the highest yields go up to 15% or more, they aren’t necessarily reliable. It’s best to choose stocks with a long track record of making payments and increasing the yield.

A good example is Greencoat UK Wind  (LSE:UKW) , a FTSE 250 real estate investment trust (REIT) that invests in the renewable energy sector. REITs provide a 20% tax-deductible benefit for individual shareholders.

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.

Harnessing the power of wind

Greencoat UK Wind specialises in onshore and offshore wind farms. With renewable energy on track to reach a goal of triple capacity by 2030, demand for wind power should remain high. The company’s assets already supply 10Mw of power to UK homes and last month it signed a new 10-year Power Purchase Agreement (PPA) for its Ballybane Phase 1 wind farm.

With a 7.5% dividend yield, it’s double the FTSE 250 average yield of 3.23%. It’s been paying a dividend consistently for over 10 years, during which time it has mostly been between 5% and 6%. However, the share price of £1.35 hasn’t changed much in five years, other than a brief increase during 2022. But that wouldn’t concern me much. It’s fairly common of income shares, which focus on providing returns via dividends.

Created with Highcharts 11.4.3Greencoat Uk Wind Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Financials and risks

While the trust’s dividends are steady and reliable, earnings and revenue are in decline. Projections indicate it could become unprofitable next year. With increased investment pushing up the share price, its price-to-earnings (P/E) ratio is now at 25 times. That’s a lot higher than the industry average of 16.8.

This also means earnings per share (EPS) has decreased to 5.5p — well below the current 13.7p dividend. As a result, the yield might be reduced later this year or next. However, based on the prior 10-year track record, payments should remain consistent.

The bottom line

Greencoat UK Wind has a solid balance sheet that seems stable enough to handle a period of losses. It’s debt of £1.8bn is well-covered by equity and assets significantly outweigh liabilities. Its debt-to-equity (D/E) ratio is 47% and interest coverage is 3.1 times.

With strong industry growth and an exceptional track record, I believe the trust will continue to pay reliable dividends for the indefinite future. And I’m not alone. On 22 May, Barclays put in an overweight position for the stock, indicating it believes the stock will outperform its sector average over the next eight to 12 months. 

As such, I think it would make a great additional to a dividend portfolio aimed at building a second income stream. If I invested £20,000 into a portfolio with an average yield of 7% and a 2% annual price increase, it could grow to near £400,000 in 30 years. It’s not guaranteed, but that amount would pay out a second income £34,500 in dividends per year.

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.

Mark Hartley has positions in Barclays Plc. The Motley Fool UK has recommended Barclays Plc and Greencoat Uk Wind 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

2 key reasons Nvidia stock could still soar from here

Even after the chipmaker's stunning performance in recent years, this writer sees reasons that could potentially help propel its share…

Read more »

Investing Articles

Here’s how £10k could set a stock market beginner on the path to riches in 2025!

Christopher Ruane sets out how taking a considered approach could mean even a stock market novice with £10k to invest…

Read more »

Investing Articles

The BAE share price struggles despite strong earnings and a 10% dividend increase. Is it still a buy to consider?

The BAE share price dipped 3% in early morning trading after posting its full-year 2024 results. Our writer considers if…

Read more »

Investing Articles

Could this Nvidia-backed growth stock be a millionaire-maker at $10?

This little-known artificial intelligence growth stock is backed by chipmaker Nvidia and recently jumped nearly 24% in a single day!

Read more »

US Stock

£10,000 invested in the S&P 500 the day before the presidential election is now worth…

Jon Smith explains how the S&P 500 has performed since last November and identifies a key winner in the months…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Should I consider buying Glencore as its share price slumps to multi-year lows?

FTSE 100 stock Glencore continues to see its share price slump. Now at its cheapest since September 2021, should I…

Read more »

Investing Articles

£5,000 invested in Lloyds shares 3 months ago is now worth…

Lloyds shares have done well over the past three months but all of the bank's FTSE 100 peers have done…

Read more »

Investing Articles

Should I buy gold stocks for my ISA or SIPP as bullion prices surge?

Many gold mining stocks are doing well at the moment. Could they be a smart buy for Edward Sheldon’s investment…

Read more »