There are several ways to earn additional income. This could be taking on extra part-time work or buying a home to rent out. However, from my perspective, investing in stocks and shares is the most time efficient and often lucrative way of earning that second income.
Capitalising on bad news
As billionaire investor Warren Buffett says: “Bad news is an investors best friend.” And despite falling US inflation, there’s not a huge amount of good news around at the moment. All this bad news creates opportunity.
Investing when share prices fall can present several advantages. For one, it delivers an opportunity to purchase stocks at a discounted price compared to their intrinsic value. Buying at a lower price can potentially lead to higher returns when the market recovers and prices rise again.
Moreover, when share prices fall, dividend yields rise — assuming the payments don’t change. Investing in dividend-paying stocks during a market downturn can provide an opportunity to secure a higher yield on your investment. This can offer a steady income stream, especially for long-term investors focused on building a portfolio for income generation.
Passive income from fallen stocks
Investing when share prices are falling requires discipline and the ability to overcome emotional biases. But it certainly can be worth it. Right now, there’s more than 50 stocks on the FTSE 350 with dividend yields in excess of 6%.
Historically, 6% is a very sizeable yield. The fact that there are so many companies with elevated yields at this moment in time reflects the depressed nature of the market. For context, over five years, the value of the biggest 350 listed companies in the UK has fallen 5%.
As such many investors, including myself, see the current environment as an excellent opportunity to lock in high-yielding stocks with low valuations, like Legal & General with its 8.3% yield.
Rags to riches
Naturally, to take full advantage of the current situation, it’d want to have cash on hand. However, if I were starting from nothing, I could still use the current market environment to create a high-yielding portfolio.
For example, if I were to contribute £200 a month into a Stocks and Shares ISA, and achieve 7% in dividend returns, and 3% in share price growth, after just five years my portfolio would be large enough to generate £1,000 as an additional income.
This is all possible due to the size of the yields available at the moment. Moreover, if UK stocks were to break out of their depressed valuation cycle I could expect considerable share price gains as well.
If I were to continue investing in this manner for 30 years, I could have a portfolio worth £450,000. In turn, this could generate annualised returns of £45,000, assuming some of those returns come in the form of sold share price gains.
Of course, this compound returns strategy sounds fantastic. But I could lose money if I choose my stocks poorly. That’s why it’s incredibly important to do my research and seek out share tips.
