£7,000 in savings? Here’s one strategy to target a second income worth £2,000 a year

The idea of generating a second income from the stock market has always fascinated me. Dividend shares, in particular, are a popular route. These are companies that return a chunk of their profits to shareholders in the form of cash payments.

The amounts vary, but the most appealing names usually combine decent yields, sustainable coverage, and a track record of maintaining or even increasing their payouts.

Let’s break down a simple example. Imagine an investor starts with £7,000 and achieves a compound annual growth rate (CAGR) of 7%. After 20 years of reinvesting those dividends, the capital could grow to around £27,700.

At that level, a yield of 7% would mean an annual second income of roughly £1,940. That’s pretty close to the £2,000 mark.

Of course, that’s just a model – dividends aren’t guaranteed, and a falling share price could drag down the CAGR. This is why investors should diversify across several dividend shares rather than betting on just one. Choosing companies with strong earnings, stable cash flow, and reasonable payout ratios can help reduce the risk of income being cut.

The FTSE 100 hosts many popular dividend shares but I think there’s also a lot of untapped potential on FTSE 250.

A stock to consider

One FTSE 250 stock I think is worth weighing up is OSB Group (LSE: OSB). This is a challenger bank that focuses on niche mortgage lending and loans for small businesses. It operates through its OneSavings Bank and Charter Court Financial Services divisions.

While not a giant compared to the UK’s high street banks, OSB has carved out a profitable niche.

The stock has risen about 40% so far in 2025, but it still looks cheap. The shares currently trade on a forward price-to-earnings (P/E) ratio of just 7.65, which suggests the market isn’t overvaluing its earnings potential.

Profitability also looks robust, with a net margin of 13.2% and a return on equity (ROE) of 12%. That’s a decent return for shareholders.

From an income perspective, the yield’s more modest than some high-yield names at around 6.1%. However, it’s well-covered, with a payout ratio of 48% and sufficient cash generation to support the dividend.

That gives me confidence that payments could be maintained, assuming the business keeps performing.

Assessing viability

But it’s important to stress the risks. As a mortgage lender, OSB is highly sensitive to interest rate movements. A squeeze on net interest margins could hit profits, especially if the Bank of England shifts rates in a way that pressures lending spreads.

There’s also exposure to the UK housing market. A downturn in property values or rising default rates among borrowers could put a dent in earnings and dividends.

These are real factors investors need to weigh up before adding OSB to a portfolio.

For me, OSB is a stock worth considering as part of a diversified income strategy. Its valuation looks reasonable, profitability appears strong, and the dividend’s covered. But like all income shares, it comes with risk.

So building a portfolio of several reliable dividend payers is often the smarter approach to generating a long-term second income.