Is it really possible to generate a five-digit second income by investing just a few pounds a day? Let’s take a look.
I’ve always fancied having a passive income stream. Something to top up my day job, and turbo-charge my pension when I retire. I’m aiming to do it by investing in FTSE 100 shares. They offer me two huge advantages.
First, I get the prospect of capital growth. After a lean five years, I think the UK’s blue-chip index looks cheap and ripe for a recovery, although we may have to remain patient for another year or two.
Time is on my side
Second, FTSE 100 stocks pay some of the most generous dividends in the world, and that’s how I’ll fund my second income. Taylor Wimpey, Rio Tinto and Imperial Brands all yield more than 8% a year right now, to name just three. Plenty more yield around that mark.
I’d build up a portfolio of income stocks covering different parts of the economy, to spread my risk. Today, while I’m still working flat out, I’d reinvest all my dividends straight back into my portfolio to boost its value. Assuming I stay healthy, I’ll start drawing them as a second income around the time my State Pension kicks in.
Dividends are never guaranteed, of course, and nor is stock market growth. My calculations here aren’t set in stone, but they show what can be done if I apply myself.
Many newbie investors see stocks and shares as way to get rich quick, but I don’t agree. I think they’re a terrific way to get rich slowly. Turning £3 a day into a second income of £10,000 a year isn’t going to happen overnight.
Let’s say I invested in FTSE 100 shares that yielded 7% a year on average. To generate income of £10,000 a year, I’d need roughly £143,000. If I invested £3 a day, and the FTSE 100 grew at its long-term average of 8% a year, with dividends reinvested, I would get there in just over 31 years. So it takes time.
I’ll do my homework
However, if I increased my initial £3 a day contribution by 10% every year, to outpace inflation, I could cut that to just under 22 years. Obviously, the more money I pay in, and the longer I leave it invested, the more capital growth I can hope to generate (and the more income that will pay me).
Researching individual FTSE 100 stocks takes time, but it can be fun too. I don’t simply buy companies with the highest yields. For example, Vodafone Group currently deals around 10%, but I think it may struggle to sustain that as the company requires an overhaul.
Dividends can be cut whenever the board says so. Earlier this year, housebuilder Persimmon slashed shareholder payouts by 75%. Mind you, it was set to yield 20% at the time, which always looked unsustainably high.
Well-run companies look to increase their dividends, year after year. In 2022, Lloyds Banking Group yielded 5.94%. That is forecast to hit 6.37% in 2023 and 7.09% in 2024. A second income that rises steadily every year? Count me in.
