Generating a second source of income can help take the sting out of life. It can provide an additional safety net for some major unexpected expenses. And it can fund a nicer place to live, more exotic holidays or an early retirement, perhaps.
Even better is if this can be made through minimal effort daily. And the best way I have found of doing this is by investing in shares that pay high dividends.
Starting from nothing in the bank
Many people are under the misapprehension that they need a sizeable chunk of money to start investing in shares. But this is not true.
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For the price of a fancy coffee or a pint of beer each day, anyone can build a big second income.
£5 a day (£150 a month), for example, invested in a stock like Imperial Brands (LSE: IMB) would currently yield 7.4% a year.
So, in the first year, this would make £133 in dividends. This might not seem a lot, but it is only the start of the process.
Every penny put into a dividend-paying share can be turbo-boosted to an extraordinary degree through what is called ‘dividend compounding’.
This means using the dividends paid each year to buy more of the stock, which in turn means more dividends.
Big second income generation?
Given £5 invested daily, and an average yield of 7.4%, after 10 years the total investment pot would be £26,360! This would pay £1,951 a year in dividends, or £163 every month.
That is not guaranteed, of course, but if this was kept up over 30 years, then the total would be £190,097. This would pay £14,067 each year, or £1,172 every month!
Does it have a history of high dividends?
I hold Imperial Brands shares in my high-yield portfolio, and it has consistently paid high dividends.
In the past five years, working back from 2023, it paid 7.4%, 7.6%, 8.9%, 10.1%, and 11.3% in dividend yields.
Consensus analysts’ forecasts are for the dividend to rise to 163.3p a share in 2025 and to 171.7p in 2026. On the current £19.95 share price, this would give respective yields of 8.2% and 8.6%.
How does the business look?
Dividends are powered over time by earnings and profits, so a strong business is essential to me in picking shares.
There are risks in all companies, of course, and Imperial Brands is no different. It is currently transitioning away from tobacco products and towards nicotine replacement ones. So, the main risk here is that this transition falters, allowing its competitors to gain a market advantage.
However, the underlying business looks good to me. Its full-year 2023 results showed operating profit up 26.8% from 2022, to £3.4bn.
In H1 2024, its adjusted operating profit rose 2.8% year on year. Net revenue growth for its next-generation nicotine products increased by 16.8% in the period.
Overall, consensus analysts’ estimates are that its earnings per share will rise by 5.9% a year to end-2026. Return on equity is forecast to be 47.9% by that point.
