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Second income from just £10 a day to £1k a month! How do I do that?

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Second income can be crucial in times of crisis – a lost job, a mortgage rate hike, or a medical emergency. The list goes on. Creating another income stream may sound daunting, but it doesn’t have to be.

One possibility I have found is to invest in high-yielding dividend stocks and harness the power of compound returns. Starting with just £10 a day, I believe £1,000 a month is possible. Here’s how.

Potential profit from dividend shares

A dividend is a small reward that some companies pay to their shareholders annually. Dividend yield represents the percentage that shareholders receive per share. This usually ranges from 1% to 10% depending on the company, but higher yields are often less reliable. Production is often volatile and can be cut entirely if profits are low.

On average, a portfolio of well-selected dividend stocks can expect an annual yield of 5%. This is in addition to the gains from annual share price appreciation. gave FTSE 100 has historically returned 7.7% annually but 6% is a conservative estimate for the average investor.

Investing £10 a day, that’s £3,650 a year. With an average dividend yield of 5% and share price growth of 6% per annum, a compound investment could grow to £22,774 over five years. Interest on this would pay around £876 per annum. In 10 years this would have grown to £61,314, paying a dividend of £2,644 per annum.

Not bad, but not life changing.

However, after 21 years, the pot could have grown to £266,830, which pays a dividend of £12,068 a year – more than £1,000 a month. Yes, 21 years can seem like a long time. But a potential £1,000 a month in extra cash – indefinitely – by spending just £10 a day? That sounds like a good deal to me.

Of course, this is just one example. Actual figures may vary depending on market fluctuations and economic conditions.

Which Dividend Shares to Choose?

Dividend stocks can be tricky because there are many factors involved. A high yield may seem attractive but may be unreliable. Occasionally, a company raises its dividend yield to woo shareholders, only to halve it again the following year. It is best to look for companies with a track record of consistent and reliable dividend payments.

A good example is the British Fast Moving Consumer Goods Company. Unilever (LSE:ULVR).

As a producer of daily necessities Pigeon soapHellmann’s Mewand Lipton Tea, its products are always in demand. This makes it a highly defensive stock with a stable income stream, regardless of the economic environment.

Most importantly, it has a decent 4% dividend yield and a solid track record of reliable payouts.

But at £38 a share, the price isn’t exactly cheap. It is up 224% in the last 20 years but down 11.8% in the last year and recent performance has not been good. Some analysts believe that Unilever needs to innovate to keep up with new disruptive technologies. With a price-to-earnings (P/E) ratio of 17.3, it is trading close to fair value and unlikely to gain much in the short term.

However, I still think it would make a great addition to a dividend portfolio. Combined with other dividend stocks and some growth stocks, a good average yield can be achieved with reasonable returns. If I were building a dividend portfolio today, I would buy Unilever shares.

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