Where’s the best place to invest for a second income? Well, compared to their US and European peers, UK shares trade at a staggering discount right now.
One estimate from Liberum put the discount at 25% for European stocks and 30% for US stocks. Looking purely at earnings, stocks across the pond cost twice as much.
Why are shares here so cheap? Well, it’s a messy topic, but UK shares flatlining since 2017 shows a mismanaged post-Brexit transition might have something to do with it.
The good news is these conditions are perfect for bargain hunters. By taking advantage of discounted UK stocks, I could aim to turn £100 a month into a £12,323 yearly second income. Here are the three steps I’d take today to achieve that.
Save money
The first one? Save some money. I’m hoping to have £100 left at the end of the month for investing. That’s nothing to sniff at in a cost-of-living crisis where the cost of food and other essentials has gone through the roof.
But even if I manage to carve that out my budget, it doesn’t add up quickly. Even 30 years of diligent saving of £100 a month only gives me a cash sum of £36,000.
| £100 a month | |
| 1 year | £1,200 |
| 5 years | £6,000 |
| 10 years | £12,000 |
| 20 years | £24,000 |
| 30 years | £36,000 |
Of course, that is quite a lot of money, but without a consistent return then it won’t be useful for income. For this, I’m looking to underpriced UK shares to accelerate my earning power.
Invest
So my second step is to invest. The London Stock Exchange offers thousands of companies for me to choose from and, despite a recent lean period, the historical return for shares in this country comfortably beats most of the globe.
How much would I receive? Well, that’s not an easy question to answer. The stocks I invest in have a huge effect, and if I get it wrong, I could end up with subpar returns or even lose money.
But if I can use the current market bearishness to snaffle up shares on the cheap, I might target a 12% yearly return.
Collect
My final step is to invest through a Stocks and Shares ISA or a SIPP. These accounts let me buy into companies and avoid punishing taxes on dividends or capital gains. With a £20k maximum deposit a year on the ISA, I could feasibly go my entire investing career without sending a single penny to the taxman.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
So let’s put this together then. Here’s what my £100 a month in UK shares could turn into:
| £100 a month | |
| 12% | |
| 1 year | £1,277 |
| 5 years | £8,110 |
| 10 years | £22,404 |
| 20 years | £91,986 |
| 30 years | £308,097 |
Now, my final sum of £308,097 can be withdrawn at 4% a year to hand me a £12,323 second income. An income stream so high would give me financial security and may be used to top up a pension or help me retire earlier.
The 4% amount is key. By withdrawing less than the average returns, my original sum will likely stay intact. That gives me a big rainy day fund or something to leave behind for loved ones as well.
