Buying dividend shares to build a second income is one of the most popular ways to approach the stock market. With all the high yields available from British stocks, it’s easy to see why the method’s attractive.
Throw in the uncertainties caused by volatile stock prices and hunting dividends becomes even more compelling. But it doesn’t stop there. Many companies have a long record of raising their dividend payments each year. So shareholder incomes can grow over time.
On top of that, investors have the opportunity to reinvest their dividends in order to build even bigger income down the line.
Tax-freedom and diversification
With £10k to invest now, investors could begin by opening a Stocks and Shares ISA. It would be a decent account to use for holding the dividend shares of choice. ISAs are tax-free and the money can be accessed at any time — great!
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.
Putting £2k into each investment made would make it possible to diversify between five positions and spread the risks.
One possibility to consider is a collective vehicle such as an investment trust focused on income. An example is Henderson High Income Trust, but there are several to choose between.
Trusts are found on the stock market, just like other shares. But their business is investing in stocks, shares and bonds themselves. So they are like a fund with many underlying positions and all under the care of an investment manager.
Owning shares in at least one trust would give investors another layer of diversification. It would also remove some of the responsibility for stock-picking. Instead, the investment manager does it!
That option may become more attractive the older investors become. After all, there’ll be all those tea dances and bowling matches to attend, or perhaps bungee jumps to perform. How will investors ever have time to pore over company accounts at a computer screen in retirement?
Nevertheless, the other four positions could be the shares of individual companies. A tactic that can target higher returns.
A high and growing yield
One example of a dividend-paying stock that looks attractive right now is MONY Group (LSE: MONY), the tech-led savings platform. The company is known for its comparison websites such as MonySuperMarket, MoneySavingExpert, and others.
It’s been a good business and the company has a decent multi-year record of consistent operating cash flow. City analysts expect the dividend to increase by single-digit percentages this year and next.
However, there’s some risk here because of the competitive nature of the sector. On top of that, the share price has been in decline for a while, a situation that may continue.
One challenge is that the Home Services and Travel revenues have been struggling despite strong trading in Insurance and Cashback.
Nevertheless, with the share price near 197p, the forward-looking dividend yield for 2025’s around 6.7%. That looks like decent value and the stock’s worth further research and consideration for a second income dividend shares portfolio.
