Ken Fisher once famously said that “time in the market beats timing the market.” And that has to be especially true when it comes to building a long-term second income.
There’ll be no attempts to time the market for me, then.
But, if a stock I like falls and looks even better value? Well, that can be a bonus.
Cheap bank stocks
As it happens, the NatWest Group (LSE: NWG) share price just took a hit from a bad news day.
On 27 October, the bank reported an unexpected drop in Q3 profits. And an independent probe found “serious failings” its handling of Nigel Farage’s Coutts account.
That gave NatWest shares a fresh kicking. They’ve now fallen 30% so far in 2023, and 25% over five years.
Second income?
That puts the stock on a forecast price-to-earnings (P/E) ratio of 4.7, only about a third of the FTSE 100 long-term average.
And it pushes the forecast dividend yield up to 7.5%.
It all makes me ponder how much I might need to invest in NatWest shares, and for how long, to bag a second income of £1,000 per month.
Interest rates, dividends, share prices, and all sorts of things will change in the coming decades, for sure.
But working out some possibilities based on today’s snapshot should, hopefully, give me some idea of whether NatWest could be a top buy for a second income.
Just the dividend
So, if the NatWest share price and dividend yield stay where they are, what might I achieve?
To get my monthly £1,000, I’d need a pot of around £163,000. That would earn me £12,200 per year from a 7.5% annual dividend.
Now, I don’t really need to check my pockets to see if I have a spare £163k.
But suppose I can invest a full year’s Stocks and Shares ISA allowance in NatWest shares. That’s £20,000, and right now I’d get about 11,000 shares with it.
And if I reinvest my 7.5% dividends each year, I could hit my target in 29 years.
The real world
In the real world, things don’t work out so simply.
If banks have a hard time for much longer, which it looks like they could, dividends could be cut. But when we get past our high inflation, they might grow.
Then, share prices might rise, which is good in one way. But it also means I’d get fewer new ones with my dividend cash each year.
And most people, rather than filling a single ISA just once, are more likely to invest less, but keep it going year after year.
Diversification
I’d always want diversification, to try to reduce my risks. So there’d be no single-stock ISA for me.
But I see many more cheap stocks on good dividend yields out there, so that’s no problem.
It all makes me think that buying dividend stocks in a diversified ISA, and holding for the long term, should give me my best chance at building a second income stream.
And NatWest could be one of my picks.
