Stock market

£11,000 in savings? Here’s how I’d plan to turn that into a £15,080-a-year second income

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There are many options when it comes to making a second income. I could start a side hustle, or become a landlord. But the best way for me is to buy dividend shares.

It is relatively hassle-free. All I have to do is target the right businesses and make sure they are performing as they should.

But if I have some cash and want to start earning extra money through income stocks, what do I do and buy?

The average amount saved in the UK is £11,000. So let’s use this as an example. Here is how I would go about it.

Due diligence

The first thing I would do is look for stocks that currently pay a handsome dividend yield. I think there are a lot of stocks like this. FTSE 100.

The average yield of the index is 3.9%. In comparison, S&P 500Only 1.4 percent is. So, Footsie’s generous payouts make it a great place to start.

In addition to finding stocks with high yields, I will also need to do my due diligence. I want to find businesses with a solid record of paying back investors. While this doesn’t mean the case will hold up, since profits are never guaranteed, it gives me more confidence to invest in stocks.

A good example

An example I like (and own) is HSBC (LSE:HSBA). The stock started 2024 in strong fashion, rising 10.6 percent. At its current price, it yields a healthy 7%.

Moreover, it is predicted to grow to around 8% by 2026. Last year, it raised its dividend payout to 61 cents a share from 31 cents a share, while launching a $2 billion share buyback scheme, underscoring its desire to return value to shareholders. .

On that note, in its Q1 update, it announced a special dividend of 21 cents per share following the sale of its banking business in Canada, as well as a fresh $3bn buyback scheme.

Investments come with risks and the biggest thing I see for HSBC at the moment is its investment in China and particularly its property market which is volatile.

But I still like the look of HSBC today. The stock looks cheap. It trades at just 7.5 times earnings, below the Footsie average of 11. On top of that, it has a price-to-book ratio of 0.85, where 1 is considered a fair value.

If I wanted to start generating second income today, it would be stocks like HSBC that I would target.

Other income

But how much can I earn from my £11,000? Well, taking HSBC’s 7% yield and applying it to my money would give me an income of £770 per second. This is nowhere near my goal.

To reach this, I will take a few steps. First, I will reinvest my profits. Additionally, I will add a further £200 monthly contribution.

After 25 years, compounded at 7%, my £11,000 will produce £15,080 in interest. This works out to around £1,257 a month, which will go a long way in allowing me a more comfortable lifestyle.

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