We’d all love to earn a steady second income, wouldn’t we?
There’s only one way I go about it, and it needs regular savings, time, and the UK stock market.
I want cash cow shares that can provide regular dividends. And I’d devote at least 20 years to build up my pot.
A bank, right now?
Today, I’ll look at Barclays (LSE: BARC). It might be a bit risky today, when soaring inflation is hitting banks, mind.
In the first nine months this year, Barclays set aside impairments of £1.3bn to cover bad debts and things like that. And there must be a chance of more to come.
Does Barclays face any real, long-term risk? Well, it’s in a far better state now than in the big bank crash.
It passed the last Bank of England stress tests just fine, and they simulated something worse than the 2007/08 crisis.
Short-term risk, long-term cash
There is short-term risk, for sure. I could see Barclays shares staying down for some time. And we could even see the dividend cut if cash is squeezed in the next couple of years.
In fact, I suspect FTSE 100 bank stocks might not recover until we see UK interest rates start to drop.
But, for someone aiming for a second income for retirement, who doesn’t want to take the cash for another 20 years, why would that matter?
I’d go as far as to say short-term risk can be good. It can keep shares cheap so that long-term investors can buy even more.
Diversification
But, would I want to put all my money in Barclays shares? No.
Instead, I want diversification. I owned bank shares back in 2007. But the crash didn’t hurt too much, because they were only about 10% of my holdings.
So, I’d want to aim for my £5,000 income from Barclays at the same time as putting cash into other stocks, in different sectors.
That would reduce the amount I can spare each month for Barclays.
Let’s see some numbers
How long might it take me to hit my second income goal from Barclays shares?
I’ll start with the forecast 5.4% dividend yield. Broker forecasts show it rising above 7.5% by 2025, but let’s start low.
At 5.4%, I’d need a pot of about £93,000 to get my £5,000 per year. And I could reach that by investing £200 per month for 20 years.
If Barclays manages 7.5% instead, I’d need around £67,000. And that would mean only about £125 per month over the same timescale.
In the middle
In the real word, I don’t know what returns Barclays will actually average in the next two decades. So let’s split the difference and guess at 6.5%.
That turns the sums into £160 per month for 20 years, to build a pot of £77,000. At today’s Barclays share price, that would be about 55,000 shares.
There must be lots of folk out there who could put similar amounts each month into a diversified mix of shares.
