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Owning just a handful of stocks to achieve a second income is dangerous at the best of times. Right now, the risks are even greater, with trade tariffs cooling the global economy and putting corporate profits under strain.
Diversification across dozens or more companies means the negative impact from one or two dividend shocks won’t derail an investor’s entire income strategy.
Yet spreading capital across a broad mix of stocks doesn’t have to mean investors settle for poor returns. Indeed, a £20,000 lump sum invested equally in the following assets would yield an £1,940 passive income this year alone, if broker forecasts are accurate.
Here’s why this FTSE 100 share, an exchange-traded fund (ETF), and this investment trust could be great buys to consider for a second income.
The ETF
Dividend yield: 11.2%
The Global X SuperDividend ETF (LSE:SDIP) offers exceptional diversification in its own right. It holds shares in “100 of the highest dividend paying equities” spread across industries in both developed and emerging markets.
These range from UK financial services provider M&G, Brazilian iron ore producer Vale and US retailer Kohls. This allocation split provides stability as well as the potential for long-term earnings and dividend growth.
This GlobalX fund does lean more closely to US equities, with 29% of the fund tied up in Stateside stocks. This could leave it more vulnerable to regional issues than funds with greater global diversification.
But overall, I think it’s a highly attractive way to spread risk. I also like its long record of making monthly distributions, giving investors access to their dividend income sooner.
The investment trust
Dividend yield: 8.8%
Alternative Income REIT‘s (LSE:AIRE) designed to prioritise delivering reliable dividends to investors. Under real estate investment trust (REIT) rules, it must pay at least 90% of annual rental profits out this way.
Investors have roughly 50 British REITs to choose from today. I like this one because — as with the ETF I’ve described — it provides exposure to a multitude of different sectors, giving strength across the economic cycle. Some of its assets include power stations, hotels, care homes and retail parks.
Group profits here might be affected by adverse interest rate movements that depress asset values. However, I think this risk is baked into its low valuation (it trades at a 15% discount to its net asset value per share).
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The FTSE 100 share
Dividend yield: 9%
Nearing double-digit percentages, the yield on Phoenix Group (LSE:PHNX) is the second highest on the FTSE index today.
Yet unlike many high-yield shares, this UK blue-chip offers large dividends that have proven sustainable over time. Indeed, its dividend yield has averaged 8.6% over the last five years.
As with any income share however, future dividends are never guaranteed, and especially large ones. Payouts here could disappoint if economic conditions weaken, for instance, damaging demand for its financial services.
Still, a strong shareholder capital coverage ratio of 172% provides this year’s dividend forecasts with substantial strength. Phoenix is a highly cash generative business, and I expect dividends to grow strongly over the long term as demographic factors drive retirement product demand.
