Here’s how I’d invest £3,000 in dividend shares to earn a second income

Dividend stocks can be a great way to earn extra income, in my opinion. Some of the best stocks provide stable and reliable cash flow to investors.

Now, in FTSE 100 pays a dividend of around 3.5%. Given the increase in interest rates, that does not strike me as particularly high. But as an average, it covers some of the high-dividend stocks I could choose from.

For example, 16 FTSE 100 stocks returned more than 6%. That’s better and more in line with what I would consider.

It’s not enough to just pick stocks with the biggest returns. There are a few other considerations to take into account.

Factors to consider

When I’m looking for other reliable income, I want my dividend stocks to have a decent track record. That has been paying dividends to shareholders for more than ten years gives me more comfort than just starting.

Next, I will look for a stable business model. I want these companies to live long. That often means having a strong brand, or a business model that is difficult to replicate.

Finally, I believe that the company can pay dividends to its shareholders from earnings. One measure to calculate this is called the dividend cover. Ideally, the best dividend stocks have a cover of at least 1.5, in my opinion.

Share that?

Now, few companies meet my criteria. But with £3,000 to invest, I’ll narrow down the list and split the funds across three options.

At the top of my list British American Tobacco. The share price has fallen in the past month, which has resulted in a dividend yield of 7%. It’s an opportunity and if I didn’t already own this stock, I would buy it today.

With nearly three decades of dividend history, it offers investors a reliable stream of income. The brand is well-known, which gives it a competitive edge.

Remember that the traditional tobacco market is a declining industry in developed countries. But the group is investing in new vaping products, and it is encouraging that this has started to grow.

Long term winner

If I had spare funds, I would buy it Legal & General Group. This financial services business yields 7.2% and has been distributing income to shareholders for over 30 years.

Over the past decade, investors would have earned an annual return of 10%. That’s enough to turn £3,000 into £7,781 over that period. One thing to note is that most of these gains are due to high dividends.

As many note disclaimers, past performance is no guarantee for future results. That said, with such a long-standing brand and a number of diverse businesses within the group, I think Legal & General should continue to thrive.

A solid opportunity

Finally, if I had the money, I will buy shares in it Taylor Wimpey. It may seem like an odd time to invest in a home builder. The housing market appears to be cooling, and higher mortgage rates could put pressure on buyers.

The Bank of England is expected to raise interest rates further in the coming months, but with inflation currently subdued, rate rises could be limited.

This could be an opportunity to buy a quality business with a solid 7% yield.