Image source: Getty Images
Supplementing your salary with a second income can ease expenses, speed up saving goals and calm any fears of lost work.
It can also help everyday investors solve one or more specific goals. A few examples include:
- Pay off a mortgage.
- Top up a pension.
- Reinvest to grow a future income stream.
By investing in stock market shares, you can target income in two ways:
- Capital gains: selling shares for more than you paid.
- Dividend income: cash paid by a company to shareholders.
Both matter, but they behave very differently and impact how reliable your second income will be. So how should you think about the trade-off?
Growth stocks vs dividend stocks. What are the differences?
Growth stocks target capital gains, with US technology names dominating the last decade. UK investors can gain exposure to US tech stocks through funds such as Polar Capital Technology Trust or Scottish Mortgage Investment Trust.
Dividend stocks, on the otherhand, typically have slow growth but reward shareholders regularly. They’re more popular in the UK, usually with higher yields than many US peers.
A few well-established names include Legal & General, Unilever, British American Tobacco, Severn Trent, LondonMetric Property and Halma.
Which method you ultimately choose depends on whether you want cash now or bigger balances later.
Quick comparison table:
| Feature | Growth stocks | Dividend stocks |
|---|---|---|
| Primary return | Capital gains | Dividends (cash or shares) |
| Typical volatility | Higher | Lower (often) |
| Best for | Long-term wealth building | Ongoing income needs |
How much income could be earned?
Stock index returns vary by region and period. Over the past decade, US indices such as the S&P 500 and Nasdaq typically returned between 13% and 15% annually; MSCI World returned between 7% and 9%; and FTSE All-World returned between 11% and 12%.
Using those as context, a diversified mix of domestic and international shares could reasonably target total returns near 10%-11% over the long term.
Even just a £200 a month invested over 10 years at those rates, could compound to between £41,510 and $43,997. That would be a decently-sized portfolio to start targeting meaningful income.
Why I like dividends
Dividends give you immediate cash without selling shares, or the choice to reinvest and accelerate compounding. For example, the British specialist mortgage lender OSB Group (LSE: OSB) pays a dividend of 35p per share annually and may be one to consider.
At the current share price of 501p, that equates to a yield of 7%. But a high yield means little if the payments aren’t well-covered by company funds. In this case, the FTSE 250 bank reports a 46.7% payout ratio and 2.83 times cash coverage, which is more than sufficient.
To provide added confidence, it has a 12-year-long payment record, and has increased its dividends every year since the pandemic ended.
The bank also announced a £100m share buyback, which further supports shareholder returns. But there are risks: OSB’s latest results show profit before tax down 9% to £382.5m, which highlights how a weak UK economy can hit smaller challenger banks harder.
That’s why it’s critical to build a diversified portfolio of shares, with some more highly established FTSE 100 blue-chips helping to reduce volatility during tough periods.
Should you invest £5,000 in OSB Group right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if OSB Group made the list?
Mark Hartley owns shares in OSB Group Legal & General, Unilever, British American Tobacco and Scottish Mortgage Investment Trust.
