Investing in high-yield dividend stocks is a popular method used by investors to earn a second income. The regular payouts they provide can help fund an extra holiday each year, or ensure a more comfortable retirement. They can also be reinvested back into a portfolio to compound the returns and accelerate growth.
That’s what I’m planning to do.
Recently, price growth on the FTSE 100 and FTSE 250 has tapered off, providing cheap stocks with high yields. This is because most companies continue paying the same dividend even when the share price falls. So now could be a great time to grab some undervalued dividend shares and rake in the profits.
Below, are two that I’m considering. They’re both reliable dividend payers with an average yield of 7%. They aren’t huge growth stocks but deliver an industry-average return of around 5% a year.
Assuming those metrics held, a £5,000 investment would grow to £50,000 in 20 years (with all returns reinvested). That would only pay about £3,200 a year in dividends. But if I invested a further £2,000 each year, it would grow to £200,000 — more than double my total contributions.
A pot that large would pay over £12,000 a year in dividends! So all I need to do is pick two reliable stocks, each with a solid track record of growth and dividend payments.
Have I found them?
The healthy option
Primary Health Properties (LSE: PHP) would be my top choice because of its incredible track record. For over 24 years it’s paid a dividend, with only two brief reductions. And as a real estate investment trust (REIT), it’s required to return 90% of profits to shareholders!
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It’s got some decent growth potential too, returning an average 5.15% a year since it started. So it fits perfectly into my criteria.
Naturally, a company that relies on the housing market’s at a higher risk during an economic downturn. That could explain the 27% price drop over the past five years. If interest rates go up again and housing costs rise, the stock may continue to fall.
More so, as a healthcare-focused REIT, its profits rely on funding for NHS facilities. This could see some improvement under the new government but how much remains to be seen.
The less healthy option
My second choice, British American Tobacco (LSE: BATS), is a stark contrast to a healthcare REIT. But the nation’s largest tobacco producer has been changing its tune lately. It’s fiercely promoting healthier nicotine options while legislating for stricter licensing and bans on products aimed at youth.
The company’s next-gen products have enjoyed decent growth lately, helped by a ban earlier this year on illicit disposable vapes. However, governments worldwide are introducing increasingly strict bans on all tobacco products, including vapes. Naturally, these push BAT’s profitable options into an ever-shrinking corner.
Although the share price is down 4.2% in the past five years, it’s delivered annualised returns are 6.3% since 1994. And this year has brought renewed hope for the company, up 18.3% year-to-date.
So yes, the future of the tobacco industry’s uncertain. But with an 8.5% yield and a solid track record of reliable payments, I can’t help but like the stock today.
The post Could I earn a £1,000-a-month second income with just these 2 dividend stocks? appeared first on The Motley Fool UK.
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Mark Hartley has positions in British American Tobacco P.l.c. and Primary Health Properties Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. and Primary Health Properties Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
