Image source: Getty Images
Owning blue-chip stocks that pay dividends is a way to generate a second income without having to work for it.
That's what I plan to do next year. If I follow the plan below, I think I could realistically aim to generate over £2,400 in passive income streams next year and hopefully every year thereafter.
Step one: choose an investment vehicle
My first step is to decide what vehicle I will use to invest.
That may mean choosing the stocks and Shares ISA or shares trading account that best suits my own circumstances and needs (everyone is different).
Although the standard annual ISA allowance is £20,000, I can use that allowance until the first week of April and then another year's allowance takes effect. That could give me an allocation of £40,000 in the next calendar year, along with any existing funds I have. invested. Additionally, I'm not limited to investing through an ISA; Even if I max out my allocation, I could still buy shares in a trading account, albeit without the potential tax advantages of the ISA.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
My goal will be an average return of 7%. This means I will need to invest £35,000 to reach my second income target of over £2,400.
Step two: choose the actions
That £35,000 is enough to spread over several shares.
Diversifying in that way means that if a stock turns out to disappoint me – for example, by canceling its dividend – then I don't have all my eggs in one basket. No dividend is ever guaranteed to last, although many do.
The type of income share I like to own (and do own) is FTSE 100 financial services provider Legal and general (LSE: LGEN).
As it revealed at an investor event this week, its cash-generating potential is so strong that it is weighing the possibility of increasing its share buybacks. This is in addition to a progressive dividend policy that has seen the dividend per share increase every year since the financial crisis, except for one (when it remained stable).
With its juicy 8.6% yield, I consider it potentially a great contributor to my second income. Legal & General has a proven business model, a large client base, a strong brand and a focus on the retirement market that is large and will likely remain so.
One risk I see is a sudden stock market correction causing a loss, as investments revalue and policyholders potentially withdraw their cash. However, as a long-term investor, Legal & General is the kind of passive income machine I'm happy to have.
Step three: make money without working
Will I continue to hold on?
Companies can evolve suddenly or gradually in ways that affect the investment case for better or worse.
So while I'm more of an investor than a trader, that doesn't mean I ignore my portfolio for years. Instead, I'll pay attention to see if anything happens that makes me decide to sell some stocks or buy others.
In the meantime, I'm hoping to earn my second income of over £2,400 a year, starting next year!
