How I’d invest £250 a month in shares to target a £2,000 monthly second income

There are only so many hours in the day. Like a lot of people, I don’t want to waste a lot of work. But boosting earnings with a second income still sounds attractive to me.

Here’s how I plan to do it by spending £250 a month to build a portfolio of dividend-paying stocks.

Dividends to increase my income

Let me explain what dividend stocks are. Take British American Tobacco (LSE: BATS) is an example.

Making cigarettes is quite cheap, but addictive cigarettes along with premium branding can sell at a good profit.

Last year, British America sold £27.7bn worth of cigarettes and other products like nicotine pouches. You have to pay various costs to do business, such as paying for materials, staff costs, taxes and interest charges of £1.6bn. But after all those deductions, the company still made £6.8bn in profits after tax. This is a net profit margin of 25%.

It uses around 65% of these profits to fund dividends. That is paid four times a year, and should be around £2.31 per share this year. So if I buy one share, I should get £2.31. If I buy 100, I should receive £231. And if I buy 1,000, I hope to get £2,310. That can help you create a second income.

Long-term vision

In fact, I expect it to receive dividends every year. It may even increase, as British American Tobacco has raised its shareholder payouts every year for decades.

But dividends are never guaranteed. As the interest bill is huge, the company has a lot of debt. Services that can reduce cash available for distribution to shareholders. Cigarette sales are experiencing a long-term structural decline, which may affect the company’s profits and profits.

Part of the way to manage that risk is by diversifying your portfolio across several companies. I try to keep the business I have a model of what can be profitable in the future.

Do the math

I hope it will help me increase my additional income over time.

Staying in a quality business with an attractive share price means I’m not just chasing high yields. Ultimately, however, how much dividend income I will receive depends on the amount I invest and the average yield of the stock portfolio I build.

Consider an average return of 5% for example (that means every year I make a profit of £5 for every £100 bought in shares). I need to invest £480,000 to reach my target of £2,000 per month, on average, in dividends. Save £250 a month, which would take 160 years!

I will try to speed it up by reinvesting the dividends (known as compounding). Doing so, assuming a constant 5% annual return, I could reach my target income of £2,000 a month for 45 years.

But there is still a long way to go. If I can get a higher yield while still having quality stock, that can help me get there faster. British American yields 7.1%, compared to the 5% I assumed in the example above.

It is not easy to find good stocks with good dividend yield. But this can help me because I want to make extra income for life.