How I’d invest £200 a month in UK shares to target a £41,257 second income

UK shares offer a golden opportunity right now to build a second income. Our writer explains how he’d do it, starting from scratch.

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UK stocks offer some of the highest dividends the world over. These payouts to shareholders can be a great source of second income during recessions and other economic downturns.

In fact, this is one reason why the FTSE 100 is up 3% in the last year when a comparable stock index like the US S&P 500 is down 13%.

Tough times seem likely to continue. So here’s how I’d invest £200 a month in UK shares to work towards a yearly second income of £41,257.

The important first step

The first part of building a second income is to save initial capital. Let’s say I could save £200 a month on a regular basis.

 Savings
1 year£2,400
5 years£12,000
10 years£24,000
20 years£48,000
30 years£72,000

So I can see how saving builds reasonable wealth over the long term, but this amount can be improved through sensible, low-risk investing.

Why investing is so effective

The historical returns of the FTSE 100 are around 7.8% (reinvesting all dividends). So let’s see what happens if I invest my savings, assuming a 7% return.

 Savings
 0%7%
1 year£2,400£2,476
5 years£12,000£14,239
10 years£24,000£34,210
20 years£48,000£101,507
30 years£72,000£233,890

Now it’s becoming clear how much impact those investments make over the long term. The 30 years figure is over three times higher with those 7% investment returns!

But 7% is still conservative. Many individual companies offer dividend yields higher than 7% alone, and investing in the right companies can increase those returns considerably. Let’s look at what a 10% return would do for me.

 Savings
 0%7%10%
1 year£2,400£2,476£2,508
5 years£12,000£14,239£15,312
10 years£24,000£34,210£39,973
20 years£48,000£101,507£143,652
30 years£72,000£233,890£412,569

The 10% gains really show the magic of compound interest over the long term. The 30 years total is now nearly six times what it would be without investing!

It wouldn’t all be smooth sailing, of course. Those 10% gains look great averaged out over a long timeframe, but it’s not easy to remember that in the middle of a stock market crash like the 2008 recession. And likewise, these returns are not guaranteed.

But as shorthand for crunching the numbers? I’d say these figures are pretty useful. So let’s see exactly what kind of second income I might be able to expect.

How big of a second income?

The size of my second income depends on how much I’m comfortable withdrawing. A 4% withdrawal rate, for example, is considered extremely safe over even long-term horizons of 30+ years.

That said, the 4% figure is usually suggested for those who use their investments as a standalone retirement. With a state or private pension, or other investments to fall back on, a 7% or 10% withdrawal rate may be more suitable.

  Withdrawal % per year
 Savings4%7%10%
1 year£2,508£100£176£251
5 years£15,312£612£1,072£1,531
10 years£39,973£1,599£2,798£3,997
20 years£143,652£5,746£10,056£14,365
30 years£412,569£16,503£28,880£41,257

It must be pointed out that inflation would eat into these figures, so the amounts would be less in real terms.

Still, this shows me how if I invested even £200 a month in the right UK shares I could build an impressive second income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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