How I’d invest £100 a month to target a £1,000 second income

I suspect that we want to get double money into our bank account, without needing to work. There are many ways to invest for income, but the preferred method is to own good dividend stocks.

In this section, I will explain how to create a dividend portfolio for an annual income target of £1,000, by investing £100 per month.

How I will choose the stock

This will not be a speculative growth portfolio. My focus will be on large, established companies with above-average dividend yields.

For this reason, I will start the search FTSE 100where many of the UK’s high yielding stocks can be found.

My approach is to sort the list of stocks in the index so that the highest yielding stocks are at the top. I then went down the list, selecting stocks from different sectors of the market.

In total, I would aim for a portfolio of 15-20 stocks. To reach this total, I must also include some FTSE 250 stocks to keep diversification.

Although dividends are not guaranteed and can always be cut, I use some simple checks to try and reduce the possibility of problems.

7 dividend stocks I can buy

Trying this now, one of the first stocks I get is insurance Aviva. This well-known stock now offers a forecast yield of 8% for 2023. Checking the latest brokerage forecast, I can see that City analysts expect payouts to be covered 1.6 times by Aviva’s earnings this year. For a large insurance company, that seems pretty safe to me.

Moving down, I found it British American Tobacco, with a forecast yield of 8% for 2023. Tobacco stocks aren’t everyone’s pick, but BATS hasn’t cut its dividend in at least 20 years. This year’s payout should be covered 1.6 times by earnings. Although the group has a lot of debt, I don’t expect any problems here either.

Looking further down the list, some other stocks I can think of are now included Taylor Wimpey (7%), HSBC Holdings (7%), National Grid (5.4%), DS Smith (5.1%) and Schroders (4.8%).

How long will it take?

To keep my portfolio costs small, I might consider using one of the new generation online brokers with no dealing fees. In any case, I probably accumulate contributions for several months before making each purchase, so that I can buy a large number of shares.

Based on current market conditions, I think I can build a balanced portfolio of FTSE 350 stocks with an average return of 5%. This means I need a portfolio of £20,000 to reach my £1,000 income target.

The long-term average return of the UK market is around 8% per annum, including dividends. This varies from year to year and may not be correct in the future. But using this as an assumption, I estimate it will take around 11 years to reach the £20,000 target.

This method is pretty much exactly how I created my first income portfolio a few years ago. It works well and is easy to set up. I would love to do it again.