How I’d invest £300 a month to target a £1,500 monthly second income

Zaven Boyrazian explains how to build a sizeable second monthly income by investing small lump sums regularly for the long term.

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Generating a second income stream can provide enormous financial flexibility, especially if it doesn’t require active attention. There are lots of different ways to go about establishing a steady stream of cash flow into a bank account. However, the least capital-intensive, in my opinion, is through the stock market.

With that in mind, let’s explore how I’d go about investing £300 each month with the long-term goal of earning an extra £18,000 each year.

Building wealth passively

Thanks to the innovation of exchange-traded funds (ETFs), it’s now easier than ever to throw money into the financial markets and put a portfolio on autopilot.

These instruments enable investors to mimic a well-established index such as the FTSE 100 or FTSE 250. This means their portfolio will generate near-enough the same returns as the British stock market, which has historically grown between 8% and 10% over long periods.

Assuming this trend continues, investing £300 each month at an 8% return would build up a portfolio to £450,000 over the next 30 years. With the stock market delivering an average dividend yield of 4%, that would unlock my target £1,500 monthly second income stream.

Of course, 30 years is a long time to wait. So how can investors accelerate this process?

Let’s speed things up

The easiest option is to simply invest more money. Striving for a promotion at work could be a quick way to earn more capital for investments. And should my monthly contributions grow to £500, I can take off more than five years from the waiting time.

But not everyone may have such an opportunity, or might not be comfortable with allocating more money. Fortunately, there’s an alternative way to trim the waiting time – stock picking.

By selecting individual businesses instead of relying on an ETF index tracker, a portfolio’s return can be boosted beyond the market average. Even if the overall return remains the same, a focus on higher-yielding dividend stocks can easily boost the passive income generated from 4-6%. And in this scenario, an investor would only need £300,000 instead of £450,000 to deliver on the same second income goal.

Income investments in 2024

Across the UK’s flagship indexes, Taylor Wimpey (LSE:TW.) currently stands out as a high-yielding opportunity. In fact, with the share price still below pre-correction levels, the dividend payout sits at 6.9%!

As a leading homebuilder with a massive land bank of around 80,000 plots, the long-term potential for this enterprise looks promising. Even more so considering the consistent lack of housing throughout the UK.

With interest rates set to be cut later this year, mortgage affordability is also on track to improve, helping the group expand its earnings and, in turn, shareholder rewards.

That certainly sounds like a no-brainer. But even the biggest businesses have their own risks to consider. A more recent threat surrounding Taylor Wimpey is a regulatory probe from the Competition and Markets Authority (CMA).

The CMA is investigating the possibility of price collusion among Britain’s largest homebuilders, which includes Taylor Wimpey. And should such activities be proven, a large financial penalty is likely to be announced. It’s up to investors to decide whether this risk is worth the potential reward.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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