£10,000 in savings? Here's how I would aim to earn a second income worth £17,381 a year

Saving £10,000 is not easy. So, if I can get to that impressive point, I'd like to make sure I protect the wealth I've built. What better way than using it to earn a second income?

That may sound too good to be true. But there are many ways to achieve it. Getting into the plot game is one. Although that requires an initial investment greater than £10k. How about starting a side hustle? That would work, but I think there's a less stressful way.

It buys dividend stocks. By that, I mean pointing FTSE 100 again FTSE 250 stocks that pay chunky dividend yields.

It will take some initial research to find the right stocks. However, once that is done, hopefully I can pull those stocks out of my portfolio, sit back, and watch the dividend payments roll in.

For £10,000, I'll get the ball rolling today with these steps.

I do my homework

I will start by researching the type of companies I want to own. I like FTSE 100 businesses with proven business models, large customer bases, and stable cash flows. One stock that ticks all those boxes is IM&G (LSE: MNG).

It has not been a good year for stocks. They will decrease by 10.4% in 2024. However, they have increased by 2.5% in the last 12 months.

The share price's weak performance this year may be disappointing. But as they say, every cloud has a silver lining. For M&G, its yield now stands at 9.8%.

Of course, the benefits are never guaranteed. However, since listing in 2019 the company has increased its dividend payout every year. It hopes to continue that going forward.

The business operates in a large industry and is predicted to grow. It has nearly 5m customers and over 900 institutional customers.

The risks are continued economic uncertainty and high interest rates affecting investor sentiment. As has happened at times in the past few years, this may lead to customers withdrawing money.

But the stock looks cheap, trading at a forward earnings ratio of 8.5.

Using an ISA

Then I opened a Stocks and Shares ISA. Every year UK investors are allowed to save up to £20,000 in an ISA and use it to buy shares. The biggest advantage is that all profits made are tax-free.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Numbers that speak

Taking the M&G yield of 9.8% and applying it to my £10,000 would allow me to earn £980 as secondary income. That's not bad, but I would aim for more.

That is why I would reinvest all the profits I received. By doing that I would benefit from a system called 'dividend compounding', which is a great way to build wealth.

By doing that and allowing the magic of stock market timing to do its work, after 30 years my £10,000 could generate £17,381 a year as secondary income. I would have a nest egg worth more than £186,913.

I will never invest in just one company. Diversity is important. However, this is proof that picking the right stocks has the potential to build a meaty second income over time.