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How to invest £3,000 in high-yield stocks to earn a second income

Young Asian woman with head in hands at her desk
Image source: Getty Images

High-yield dividend stocks can be a good way to generate a second income, while also investing for the long term. Although dividends are never guaranteed, many companies do provide reliable payouts.

For investors wanting a reliable second income, I’d aim to build a diversified portfolio of 15-20 shares from the FTSE 100 and FTSE 250. These larger businesses are generally well researched by City analysts. In my experience, they’re less likely to deliver nasty surprises without any early warning signs.

Here are three stocks I own, or would buy today for an income portfolio.

ITV: a turning point?

After briefly dropping below 60p in September, the ITV (LSE: ITV) share price has rallied to more than 70p. I think 2023 is likely to be a turning point for the television group, which is investing heavily in expanding its streaming service.

ITV remains the UK’s largest commercial broadcaster and also has a valuable content production business, ITV Studios. This division supplies programmes for ITV and rival firms, reducing the group’s dependence on advertising.

I think ITV’s position as a leading UK television network will remain safe. The main risk I can see is that the company’s efforts to expand its streaming services will fail to deliver the expected profits.

ITV shares are already priced for bad news, on a 2023 forecast price-to-earnings (P/E) ratio of 8. At this level, the stock offers a yield of 6.6%. I think this business could deliver attractive returns from current levels.

Foresight Solar: long-term growth

Fossil fuels aren’t going away just yet. But I think there’s no doubt renewable energy offers much better long-term growth opportunities.

One of my top picks in this sector is Foresight Solar Fund (LSE: FSFL). This group invests in solar power and battery storage projects across the UK and abroad. For example, Foresight recently invested in a 50MW battery storage project in Scotland that will be hooked up to hydroelectric power.

Foresight Solar Fund’s dividend has grown steadily since its flotation at the end of 2013.

The shares are currently trading slightly below their book value of 123p, with a 6% dividend yield. This valuation looks attractive to me.

While there’s a risk that regulatory changes to the UK electricity market could affect future earnings, I think Foresight’s strategy looks like a good bet on long-term demand for clean power.

Imperial Brands: tobacco pays 7%

My final choice is Imperial Brands (LSE: IMB). Performance at this FTSE 100 tobacco group has improved considerably over the last couple of years. Annual profits have risen from a 2019 low of £1bn to £1.6bn last year.

Imperial’s dividend is covered comfortably by free cash flow, and the group’s net debt has now fallen from a 2017 high of £12bn to a safer £8.5bn.

This stock comes with some ethical concerns, of course. There’s also the risk that over the long term, demand for cigarettes will continue to fall.

However, I think Imperial’s forecast dividend yield of 7.1% looks safe for the foreseeable future. For investors seeking a second income, I reckon it’s worth a look.

The post How to invest £3,000 in high-yield stocks to earn a second income appeared first on The Motley Fool UK.

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Roland Head has positions in ITV and Imperial Brands Plc. The Motley Fool UK has recommended Foresight Solar Fund, ITV, and Imperial Brands Plc. 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.

Motley Fool UK 2023