£7,000 in savings? Here’s one strategy to target a second income worth £2,000 a year
The idea of generating a second income from the stock market has always fascinated me. Dividend shares, in particular, are a popular route. These are companies that return a chunk of their profits to shareholders in the form of cash payments.
The amounts vary, but the most appealing names usually combine decent yields, sustainable coverage, and a track record of maintaining or even increasing their payouts.
Letâs break down a simple example. Imagine an investor starts with £7,000 and achieves a compound annual growth rate (CAGR) of 7%. After 20 years of reinvesting those dividends, the capital could grow to around £27,700.
At that level, a yield of 7% would mean an annual second income of roughly £1,940. Thatâs pretty close to the £2,000 mark.
Of course, thatâs just a model â dividends arenât guaranteed, and a falling share price could drag down the CAGR. This is why investors should diversify across several dividend shares rather than betting on just one. Choosing companies with strong earnings, stable cash flow, and reasonable payout ratios can help reduce the risk of income being cut.
The FTSE 100 hosts many popular dividend shares but I think there’s also a lot of untapped potential on FTSE 250.
A stock to consider
One FTSE 250 stock I think is worth weighing up is OSB Group (LSE: OSB). This is a challenger bank that focuses on niche mortgage lending and loans for small businesses. It operates through its OneSavings Bank and Charter Court Financial Services divisions.
While not a giant compared to the UKâs high street banks, OSB has carved out a profitable niche.
The stock has risen about 40% so far in 2025, but it still looks cheap. The shares currently trade on a forward price-to-earnings (P/E) ratio of just 7.65, which suggests the market isnât overvaluing its earnings potential.
Profitability also looks robust, with a net margin of 13.2% and a return on equity (ROE) of 12%. Thatâs a decent return for shareholders.
From an income perspective, the yield’s more modest than some high-yield names at around 6.1%. However, itâs well-covered, with a payout ratio of 48% and sufficient cash generation to support the dividend.
That gives me confidence that payments could be maintained, assuming the business keeps performing.
Assessing viability
But itâs important to stress the risks. As a mortgage lender, OSB is highly sensitive to interest rate movements. A squeeze on net interest margins could hit profits, especially if the Bank of England shifts rates in a way that pressures lending spreads.
Thereâs also exposure to the UK housing market. A downturn in property values or rising default rates among borrowers could put a dent in earnings and dividends.
These are real factors investors need to weigh up before adding OSB to a portfolio.
For me, OSB is a stock worth considering as part of a diversified income strategy. Its valuation looks reasonable, profitability appears strong, and the dividend’s covered. But like all income shares, it comes with risk.
So building a portfolio of several reliable dividend payers is often the smarter approach to generating a long-term second income.
The post £7,000 in savings? Hereâs one strategy to target a second income worth £2,000 a year appeared first on The Motley Fool UK.
Should you invest £1,000 in OSB Group right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool 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?
More reading
- US stocks look bubbly. Will the stock market crash in 2025?
- 3 bargain FTSE 250 shares that deserve love in October
- 3 top ETFs to consider in October!
- How much do you need in an ISA or SIPP to target a £3,000 monthly second income?
- £20,000 in a Stocks and Shares ISA? Hereâs how you could turn that into a £15,053 passive income
Mark Hartley has positions in OSB Group. The Motley Fool UK has no position in any of the shares mentioned. 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.
