Building a second income portfolio? Here’s why it pays to factor in forex

Millions of us invest for a second income. It’s something that offers the promise of greater financial freedom, a buffer against uncertainty, and the potential to build long-term wealth without relying solely on a salary.

Many investors will look to achieve this by investing in stocks that pay a dividend. For example, £100,000 invested in a host of stocks with an average dividend yield of 5% would pay £5,000 per year.

And while UK-listed stocks provide some excellent dividend-paying options, a diversified portfolio of stocks will include companies listed overseas. There are several reasons for this including exposure to different economies. But also the FTSE 350 doesn’t offer broad exposure to dividend stocks in all sectors. That’s my opinion anyway.

Of course, the issue here is that overseas stocks are not denominated in pounds, and that means an investment is directly impacted by foreign exchange fluctuations.

A closer look

Here’s an example. Let’s say an investor bought £10,000 worth of ExxonMobil shares on 14 October 2022. This was a period of pound weakness I remember very well because I was on my honeymoon.

Sadly, for Exxon, the shares are pretty much flat in dollar terms over the period, but the pound surged around 22%. In turn, this means the Exxon shares would be worth less than £8,000 today.

The same applies to dividends. If our investor was expecting a 4% annualised dividend yield they’d be sadly disappointed. That’s simply because the initial investment would be generating around $440 a year. In 2022, that would have meant £400. But today that’s just £325.

And it’s important to remember that this fluctuation has happened over a relatively short period of time. The lesson is that exchange rate fluctuations can have a profound impact on our investments and second income objectives.

What to do?

Predicting currency fluctuations can be challenging. Morgan Stanley recently forecasted that the pound will rise to $1.45 by the second quarter of 2026. In a more optimistic scenario, the rate could climb as high as $1.51.

In such a scenario, it would be prudent to make limited investments in US-listed stocks for the time being. It’s something I’m having to think about very carefully.

And this is why I’m increasingly looking at overlooked or undervalued UK stocks at this time. Yü Group (LSE:YU) is one that stands out, notably for its impressive dividend growth.

The company’s board increased the full-year dividend by 50% to 60p per share in 2024, and further hikes are expected. Analysts forecast payouts of 84p in 2025, 90p in 2026, and 95p in 2027.

This translates to a yield of 3.3% today, rising to a projected 5.1% by 2027, a rare combination of a strong yield and rapid dividend growth.

The dividend is well-supported by strong financials: net cash rose to £80.2m in 2024 and is forecast to reach £168m by 2027.

Moreover, with shares trading at just 7.5 times 2025 earnings, Yü Group remains attractively valued. While risks remain — including energy price volatility and execution challenges — the company’s robust cash generation and disciplined growth are very attractive. It’s a stock I’m considering very closely.