Have you ever thought about trying to build a four-figure monthly second income by putting aside some money and investing it in dividend shares?
Lots of people who want a second income do just that.
As I see it (and I am one of those people), such an approach potentially offers a few different advantages.
One is that it allows even an investor with a spare £100 or £200 to buy into a massive, proven business that pays out billions of pounds in dividends each year, such as HSBC or AstraZeneca.
A second advantage is that such a second income plan can be tailored to each investor’s individual circumstances.
Getting ready to invest
Before moving on to making such goals though, a practical first step that someone could take today would be to open up an account that enables them to buy, hold and sell shares.
That could be a share-dealing account, tax-advantaged Stocks and Shares ISA or trading app, for example. A SIPP could work for some investors too, but no dividends can be withdrawn until the investor is 55.
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.
Setting the income goal: what about the target?
As I said, everyone can make their own choice. But I will be ambitious here, showing how someone starting from scratch could ultimately target a £1,850 monthly second income. I think that illustrates how with the right approach this could be a seriously rewarding thing to do.
£1,850 per month works out to £22,200 each year.
How big an investment is needed to generate that depends on the average yield. Yield is the annual dividends earned, expressed as a percentage of the amount invested.
So, at a 3.1% yield (that currently offered by the FTSE 100), the target would need a portfolio of around £716k.
Being ambitious, but still realistic
In today’s market though, I think a 6% yield is realistic. That would produce the desired second income on a portfolio worth £370k.
The investor could speed things up by initially reinvesting dividends – this is known as compounding.
Doing that, investing £1,000 a month, it would take 17 years. At £500 per month, the timeline would be 25 years, while even just £250 per month compounded at 6% annually would hit the target within 34 years.
At that point, the dividends could start to be drawn in cash, as a second income.
Here’s an income share worth considering
Above I mentioned that I thought a 6% yield is realistic in today’s market.
As no dividend is ever guaranteed to last, a portfolio ought to be diversified. One share that yields over 6% I think is worth considering right now is FTSE 100 tobacco firm Imperial Brands (LSE: IMB).
It cut its dividend in 2020 but has been growing it yearly since and the yield now stands at 6.6%.
The share price is up 63% over five years, but a 21% decline so far this year means I now think it looks like good value.
Some investors will have ethical objections to a tobacco company. I do not, but I am concerned by the risk falling cigarette sales pose to both revenues and profits.
Still, with its proven business model, extensive brand portfolio at different selling price levels and global distribution footprint, I see a lot to like about Imperial.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
