Instead of working extra hours each week, British income shares offer an alternative means of getting more cash in the bank for far less effort.
Collecting dividends is often initially slow, especially when starting from scratch. But over time, consistently drip-feeding spare earnings each month can lead to a meaningful second source of income. In fact, in the long run, even investing just £100 a month is enough to eventually provide a £1k monthly passive income. Here’s how.
Calculating a target income
Every income stock offers a slightly different yield. Looking at the FTSE 100, the average is usually around 4%. But some companies pay out considerably more. As we move into 2024, such opportunities are seemingly bountiful, given many dividend-paying companies have yet to recover from the recent correction.
So what yield should investors expect? While building an 8% income portfolio is perfectly doable, it does invite a lot of risk that not everyone will be comfortable with. But aiming for a 6% yield today without taking on excessive extra risk is a bit more realistic today. At least, that’s what I think.
If I’m aiming for a £1k monthly second income stream, that translates into £12,000 of annual dividends. At a 6% yield, my portfolio would need to be worth around £200,000. Needless to say, this isn’t exactly pocket change. But building to this substantial lump sum over time isn’t as impossible as many would believe.
Hitting six figures
A golden rule of investing is to only allocate money that isn’t needed in the next three to five years. That’s because the stock market can be a volatile place, as we’ve recently seen. And if that means only £100 can be spared each month, then that’s the budget investors have to work with. The good news is, it’s more than enough.
Assuming a 6% income portfolio matches the market average of 4% in capital gains, the total return becomes 10%. And investing £100 a month at this rate would translate into a £200,000 portfolio within around 30 years.
Obviously, waiting around for three decades is less than ideal. But by making lifestyle sacrifices like morning coffees or barely-there subscriptions, scrounging up an extra £50 a month can cut the waiting time by half a decade.
Risk versus reward
For some, investing may be the ticket to an earlier retirement. But that’s only true if a proper strategy is followed. There are plenty of dividend-paying companies to choose from, yet most lack a critical ingredient that determines long-term success. Quality.
At the end of the day, an average business will likely struggle to retain market share versus a more innovative and nimbler competitor. In the long run, that almost always translates into shrinking earnings, with dividends often following. And as a once lucrative source of passive income dries up, investors jump ship, sending the stock price plummeting.
Risk cannot be avoided when picking stocks. Even the biggest companies in the world have their weaknesses. But by weighing risk against potential reward and staying within personal tolerance levels, achieving long-term success becomes far more likely.
