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Having savings in the bank is great. But with surplus money that isn’t needed for a rainy day, keeping money on a cash account might not be the best move. Instead, these funds can be used for generating a second income via the stock market. If an investor had £10k to deploy, here’s a potential strategy worth considering.
Getting the basics right
The idea revolves around reinvestment. What I mean by this is when an investor buys a dividend share and receives an income payment, a decision needs to be made. Either the money gets spent, or it can be used to buy more of the same stock. If the latter is chosen, it can speed up the process of generating a large second income further down the line. Of course, this takes patience and discipline, but it can make a big difference over time.
Another important concept is time. Making a significant amount of money for a second income derived from the stock market doesn’t happen overnight. Those that preach get-rich-quick schemes need to be very careful. In my experience, it takes time to build up a portfolio. Yet, this isn’t a bad thing, as it allows a more diversified pot of stocks to be created.
One contender
One stock that an investor could consider including in this strategy is Investec (LSE:INVP). The specialist bank and wealth manager has experienced a 3% share price fall in the past year. The current dividend year is 7.15%, well above the FTSE 250 average.
I think it’s a good income share because it’s underpinned by solid financial performance. The latest annual report showed a 7.8% rise in operating profit, passing £1bn for the first time. Thanks to this, the dividend for the full-year was hiked from 34.5p the year before to 36.5p. The fact that the management team used some of the profits to pay out to shareholders shows that they have this as a focus.
I think Investec could slot in nicely in a long-term income portfolio. It has been paying out a constant dividend for over a decade. Even during the pandemic it continued to make payments, which is noteworthy.
It’s true that one risk is its exposure to South Africa. Some may view operations over there as potentially unstable due to the political or economic situation over there. Yet even with this, the UK business can (and does) help to diversify geographical concerns.
Talking numbers
If an investor was smart in the stocks selected, I think a blended average yield of 7% is realistic. If the dividends were reinvested, after six years the total pot could be worth £15.2k. In the following year, this could make £1,064. Of course, this isn’t guaranteed. But it shows the potential for the monetary possibilities.
