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I see a lot of stocks on the FTSE 100 that I’d rate as great buys to secure a second income. Share prices are low, and dividend yields are high. That’s the best combination, right?
But how do I narrow it down? Well, I think the financial sector is particularly attractive right now. Bank shares are forecast to lift their dividends in the next few years.
And the current analyst outlook for my choice today, insurer Legal & General (LSE: LGEN), is similar.
We’re looking at a 9% yield for the current year, one of the Footsie’s biggest.
Big yields
I often wonder how FTSE 100 dividend yields can get so high. If they’re really so attractive, why aren’t the big investors piling in to snag their share of the cash?
That would soon push the share prices up, and get yields back down closer to average. Right now, I can see a couple of reasons.
Big investment firms have seen outflows of cash over the past year, as customers have less to invest. So there’s less cash going into stocks. And we’re in a time of weak sentiment too.
But doesn’t that mean it’s bonanza time for private investors wanting to lock in a bigger second income? I think it could be.
Hit the target
So, how might I get my £1,000 a month from Legal & General shares?
Based on the share price at the time of writing, I’d need to get to a pot of around £135,000. A 9% dividend yield on that would get me a little over £1,000 per month, which meets my target.
But, and I’ve checked all my pockets, I don’t happen to have a spare £135 grand on me right now. Still, never despair. By investing regularly, over the long term, I reckon I could get there.
Stocks and Shares ISA
If I can manage a full Stocks and Shares ISA allowance of £20,000, how long might it take?
Suppose I could put that much into Legal & General shares today, and buy new shares with my dividends each year.
I work out that I could reach my nest egg target in about 23 years, and get my £1,000 monthly second income from it. So, I’d need to buy around 9,300 Legal & General shares today.
That’s a one-off investment. In reality, I invest more and more money each year, buying shares as regularly as I can. And that’s a more realistic way for most people.
The future
Now, about the only thing I can be confident of about the future is that it won’t be the same as the present.
I predict the Legal & General share price will go up or down, and the dividend will rise or fall. And I’d wager that the insurance sector will carry on through its cyclical ups and downs.
A real-world investor has those risks to contend with, and this is just a quick snapshot based on today.
But, talking of change, I see forecasts have the Legal & General dividend yield rising to 10.5% by 2025.
