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2 shares I just bought for a hefty second income

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Last week was the worst for global stock markets since March, when a US banking crisis sent markets plunging worldwide. The FTSE All-World index lost 2.6% of its value, while the UK’s FTSE 100 index fell by 3.5% (and is down 5.7% since 31 July). Even so, I’m taking advantage of these price falls to boost my second income by buying cheap shares.

Dividend shares

There are many ways I could earn a second or passive income without working.

For example, I could collect cash interest from savings on deposit. Or I could sit back and watch my coupons (that is, interest) roll in from government or corporate bonds. Alternatively, I could buy and rent out property to tenants for profit. But that sounds like a lot of hard work and hassle to me.

By far my favourite second income comes from buying and holding shares in quality UK and US companies. When these businesses do well, I benefit as an owner and shareholder from rising cash dividends and ongoing share buybacks.

At present, the FTSE 100 index offers a cash yield of around 4.1% a year. However, I aim to buy stocks that beat this cash benchmark by some considerable margin. For example, here are two shares my wife bought for our family portfolio last week, with the aim of boosting our second income.

Two FTSE dividend dynamos

Company Share price Market value Dividend yield One-year change Five-year change
M&G 185.1p £4.4bn 10.6% -11.4% -17.5%
Phoenix Group Holdings 508.2p £5.1bn 10.0% -23.3% -28.8%
*All returns exclude cash dividends.

The first point I’d make about these two FTSE 100 shares is that they’re both financial stocks. M&G is one of the UK’s leading asset managers, while Phoenix Group Holdings acquires and manages closed life and pension funds.

Of course, when both bond and stock prices plunged last year, so did these firms’ profits. As a result, their share prices are down substantially over both one and five years. However, the above returns exclude dividends, which are currently huge from these businesses.

Indeed, the average cash yield across both stocks is a whopping 10.3% a year. That’s way, way ahead of the Footsie’s forward dividend yield of 4.1% a year. And that’s why my wife and I bought these two stocks for extra passive income in the long run.

Now for the bad news

Due to both companies losing money in 2022, the dividend yields shown above aren’t covered by these firms’ trailing earnings. This is a major risk. However, with financial markets rebounding strongly this calendar year, I expect both groups to produce decent profits in 2023. And then I hope to continue banking this juicy second income for many years to come!

The post 2 shares I just bought for a hefty second income appeared first on The Motley Fool UK.

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Cliff D’Arcy has an economic interest in M&G and Phoenix Group Holdings shares. The Motley Fool UK has recommended M&G. 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.