£50k to invest? These dividend shares could provide a £4,100 second income just this year!

Looking for ways to make an abundant and reliable second income in retirement? Buying quality dividend shares could be worth considering.

Posted by

Royston Wild

Published 2 June

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.

With a sizeable retirement pot, individuals have a variety of ways they can use their wealth to target a second income.

For instance, they can:

• Draw down a percentage each year (4% is a popular figure that provides money for around 20 years).
• Invest in rent-generating real estate.
• Purchase an annuity product.
• Load up on corporate and government bonds.
• Invest in dividend-paying shares.

I plan to purchase dividend shares to fund my own retirement. I’m confident it can deliver a long-term passive income while providing potential for further portfolio growth.

Six of the best

Investing in dividend shares can be a riskier choice than, say, purchasing an annuity that provides a set income every year. Dividends are never guaranteed, and a range of internal and external issues can arise that cause companies to slash, postpone, or cancel shareholder payments.

Individuals can substantially reduce this risk by investing in a range of companies, however. Take the following selection of UK dividend shares as an example:

Dividend share	Sector	Forward dividend yield
Legal & General Group (LSE:LGEN)	Financial services	9.1%
The Renewables Infrastructure Group	Renewable energy infrastructure	9.7%
HSBC	Banking	5.8%
Global X SuperDividend ETF	Exchange-traded funds (ETFs)	11.1%
Assura	Real estate investment trusts (REITs)	6.8%
Pennon Group	Utilities	6.9%

This portfolio spans a variety of sectors and geographies, reducing the risk of isolated problems and ensuring (in theory) a stable return over the economic cycle. The Global X SuperDividend ETF alone has holdings in 100 high-yield companies (including Phoenix Group and M&G) from multiple industries worldwide.

Pleasingly, each of these businesses carries an ultra-high yield right now. If broker forecasts are correct, a £50,000 investment spread equally across these UK shares would provide a £4,100 passive income over the next year.

That’s not all. I’m optimistic that this portfolio will deliver a growing cumulative second income over time as well.

A FTSE 100 dividend hero

Out of this selection, I think Legal & General shares are worth particular attention from dividend investors. I own them in my own portfolio, and plan to buy more when I next have cash to invest.

As I say, dividends are never certain, even among companies with excellent payout records like this. Payouts here haven’t been cut since 2011, and have risen every year (bar one) since then.

This year’s predicted dividend is covered just 1.1 times by anticipated earnings, leaving little wiggle room if profits are blown off course. If tough economic conditions dent demand for discretionary financial products, dividends here could well disappoint.

Yet I’m optimistic that Legal & General could still hit the City’s dividend projections. With a Solvency II capital ratio of 232%, it has substantial financial resources to hit its dividend growth goals (2% per year) and share buyback targets through to 2027.

And beyond then, I think dividends could keep rising as demographic changes supercharge demand for retirement and wealth products.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Because The Global X SuperDividend ETF pays a monthly dividend, whilst you re-invest the dividends back into your snowball the total yield will be higher.

There are two emotions in the market fear and greed,
the problem is we hope when we should fear and
fear when we should hope.

William J O’Neil

Summary for 5 3/8% Treasury 2056

Key Information
ISIN GB00BT7J0241
TIDM T56
Exchange LSE
Par Value £100
Maturity Date 31/1/2056
Coupons per year 2
Next coupon date 31/7/25 e
Coupon 5.375%
Income Yield 5.39%
Gross redemption yield 5.38%
Accrued interest 49.51p
Dirty Price £100.43

Summary for 5 3/8% Treasury 2056

Key Information
ISIN GB00BT7J0241
TIDM T56
Exchange LSE
Par Value £100
Maturity Date 31/1/2056
Coupons per year 2
Next coupon date 31/7/25 e
Coupon 5.375%
Income Yield 5.39%
Gross redemption yield 5.38%

An alternative to using the 4% rule would be to buy a gilt ladder or a U$ Treasury ladder.

Pointers to know.

If you buy a gilt below or around its issue price, with a gilt it’s £100, you will not lose any of your hard earned if you own until maturity.

Using the table above.

The yield is 5.38%, so you would receive two income payments a year.

If you hold until 31/01/2056, you will receive your cash back without taking any action. Between now and 2056 a lot will happen with interest rates.

If they continue to fall, you should be able to flip your position at a profit. Although you might find it difficult to re-invest the funds at a decent interest rate.

If/when interest rates rise, the price of your gilt will fall and you will be locked into your position, although you could then add to your position at a better rate than 5.38%

In general if your want to buy gilts outside a tax free wrapper, you need to buy a low coupon as any capital gains are tax free.

Key Information
ISIN GB00BL68HH02
TIDM TG30
Exchange LSE
Par Value £100
Maturity Date 22/10/2030
Coupons per year 2
Next coupon date 22/10/25 e
Coupon 0.375%
Income Yield 0.45%
Gross redemption yield 4.04%

Inside a tax wrapper, the world’s your onion.

One strategy would be to buy several different years, then when the gilt matures you may or may not be able to re-invest at a higher rate but you could spend your hard earned on you or your family.

The bond market: a once-in-a-decade opportunity to lock in passive income?

Story by Dr. James Fox

Bonds have long been a cornerstone for investors seeking steady, predictable passive income. But with yields at multi-year highs, the bond market is now offering a rare chance to lock in attractive returns with relatively low risk. This combination is drawing new attention from UK investors.

How do bonds work ?

A bond is essentially a loan an investor makes to a government or corporation. In exchange for the money, the issuer promises to pay the bond holder regular interest (known as the coupon) and to return the original investment (the principal) when the bond matures. Bonds are considered fixed-income investments because they typically pay a set interest rate over their life, making them a popular choice for those seeking reliable income streams.

The appeal of bonds for passive income is straightforward, especially now. For example, UK government bonds (gilts) are currently offering yields not seen in over a decade. The 10-year gilt yield stands at around 4.65%, while the 30-year yield is just over 5.4%.

This means that if someone were to invest £10,000 in a 10-year gilt, they could expect to receive £470 per year in interest — more than double what they would have earned five years ago. The only significant risk is if the UK government were to default on its obligations. However, this is widely considered extremely unlikely, making gilts far less risky than most stocks.

Looking overseas
Across the Atlantic, US Treasury bonds are also offering attractive yields. The 10-year US Treasury yield is currently about 4.46%, and the 30-year yield is just under 5%. These rates are historically high for such safe assets. This higher-than-usual yield reflects near-term economic uncertainty and Trump’s plans for potentially unfunded tax cuts. But it also offers investors a rare window to lock in high passive income for years to come.

For those willing to look further afield, some overseas bonds offer even higher yields, especially in emerging markets or countries facing economic challenges. While these can provide eye-catching income, they also come with increased risk, including currency fluctuations and the potential for default. For example, the South African 10-year bond yields over 10%.

Alternative exposure
Bond investing might not be for everyone. And thankfully lots of stocks offer exposure to the bond market. One of the best known is Berkshire Hathaway (NYSE:BRK.B) which offers partial bond market exposure due to its massive holdings in US Treasury bills, which provide steady interest income and stability.

Berkshire now holds over $300bn in US Treasury’s — accounting for nearly 5% of the entire market for short-term government debt. While Berkshire is a conglomerate, its defensive cash position, debt holdings, and diversified business operations help buffer against market volatility, offering shareholders indirect benefits from bond market returns.’

However, this Warren Buffett company is not a direct substitute for bond funds, as most of its value comes from operating businesses and a concentrated equity portfolio, not fixed-income assets.

And while the company has performed well in recent years, there’s going to be some uncertainty for this US-focused business going forward. It’s a stock I own and recently bought more of, but I appreciate that Trump’s policy may cause some volatility. Also, it doesn’t pay a dividend, so there’s no yield — just growth, hopefully.

A great plan has an end destination, which is impossible with a TR strategy as you are a hostage to the fate of the markets.

The choices for the end destination for your plan.

Buy an annuity. We have discussed that option on the blog and is the least favoured end destination.

Use the 4% rule, the latest research stated it would be better to use a withdrawal rate of 3.5% but we will use 4% as the comparison.

The current fcast for the Snowball is £9,120.00

The TR control share is VWRP and the current ‘pension’ using the 4 rule would be £5,188.00

With compounding it’s likely the gap will continue to widen.

If Peter had held on to that $90,000 inheritance, it would be worth a cool half a billion today. That’s the magic of Warren Buffett’s famous snowball philosophy: keep reinvesting, let it grow, and watch as your money works harder than you ever could.

The current fcast for the Snowball is to earn dividends of £9,120 to be re-invested back into the portfolio. The target is 10k which will be met as there is a return of capital from VPC, which part of can be used as a dividend top up if required.

The fcast for next year could be increased to £9,800, which is the figure in the plan for the year ending 2028 but the target as yet undecided. Remember if you can compound your dividend income at 7% pa it doubles every ten years. Compounding takes a while to grow, so the sooner you start the better your retirement will be. Better if you can ‘add fuel to the fire’ but the Snowball will only use seed capital.

At present the Snowball should receive around £3,200 in dividends in June and when re-invested should provide some income for this year but an additional £250 for next year, plus all dividends earned and re-invested in the second half of this year.

For any friends to the Snowball, don’t panic, there are only three.

One. Buy Investment Trusts that pay a ‘secure’ dividend to buy more Investment Trusts that pay a ‘secure’ dividend.

Two. Any Investment Trust that drastically changes their dividend policy must be sold even at a loss.

Three. Remember the rules.