Many stocks in the FTSE 100 pay high dividends every year. The right ones will generate a surprisingly large second income from a surprisingly small investment in a surprisingly short time!
My current favourites in this regard are NatWest, Phoenix Group Holdings, M&G, and Glencore. I hold the first two of these stocks. And I would happily buy the remaining two if I did not already have other holdings in their sectors.
Based on last year’s dividend and the current share price, these have respective yields of 12.8%, 10%, 9.7%, and 9.5%. This gives an average of 10.5%.
I could save £5 a day by simply not having that extra fancy coffee or pint of beer. That may not sound like the beginnings of a life-changing sum. But over a year it adds up to a staggering £1,825!
With an eye to the future, all this money would be invested in my (hopefully) 10.5%-yielding stock portfolio.
The magic of compounding
All dividends paid from each stock would be reinvested. And just as with compound interest, this will have a startling multiplier effect on my money.
With no further saving beyond the initial £1,825, my money could double after six years. This is providing the average 10.5% on the portfolio remained in place.
After 11 years, the initial investment would have tripled on that basis. And after 17 years, the portfolio would be making over £1,000 a year in second income.
Factoring in the FTSE
My returns might be much higher, much quicker, though. From its creation in 1984 to the end of 2022, the FTSE 100’s overall price return was 645.2%. This equates to 5.3% on an annualised basis.
If this return was factored into the four-stock portfolio, the investment could be making over £1,000 per year after just nine years. And after 26 years, it could be making over £1,000 in second income every month.
Five years after that, the total pot could be just under £200,000 to provide over £27,000 per year in second income!
Huge pension boost
According to UK government figures, a ‘moderate’ retirement can be enjoyed on an annual income of around £23,300. This would be more than funded by the 31-year returns of the portfolio model above.
However, adding in the current State Pension of £10,600 per year gives a figure of £43,000 per year. This is £5,000 more than the amount required to enjoy a ‘comfortable’ standard of living, according to the government.
That said, looking ahead over this timeframe, inflation would certainly reduce the spending power of these funds. Yet for its part, the government currently operates the famous triple lock for the State Pension. This is a guarantee that it will rise at least in line with inflation, in order not to lose value.
Of course, on the investor’s part, inflation can be mitigated by doing two things. First, continue to save into a high-yielding portfolio every year. Second, increase the amount saved in line with inflation.