I reckon it’s entirely possible to build a second income stream by investing just £5 a day.
Adding £5 up over days, weeks, months, and years could equate to a nice pot of money. Plus, I’d be making my money work by investing in dividend-paying FTSE stocks.
Let me explain how I could achieve this if I had the money to spare right now.
Rules of engagement
I need an investment vehicle, so I’m going to open a Stocks and Shares ISA. This way, I don’t have to pay tax on capital gains and dividends.
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.
Next, I need to invest my money into dividend-paying FTSE stocks with an attractive yield, solid fundamentals, and bright future prospects. These elements are key, as dividends are never guaranteed. Plus, I’d want to diversify my portfolio for a bit of protection.
Breaking down the numbers, £5 per day equates to £35 per week. Over 52 weeks, this is a total of £1,820. I’m going to aim for a rate of return of 7%. This is the average rate of return of the FTSE 100 in recent times.
Over 20 years, I’ll have amassed £79,145.09.
Next, I will draw down 5%, and split it monthly, which equates to £329.77.
This is a long-term plan for me to build up a pot, and use this money when I’ve retired. I’ll have paid off my mortgage by then. Plus, my kids will no longer rely on the bank of Mum and Dad. So I can enjoy this extra money, as well as other investments, to live life to the fullest in my later stage of life.
I am conscious that the rate of return I’m hoping to achieve may not come to fruition. On the other side of the coin, the rate could go up too!
Banking giant
One stock I reckon could help me with my goals is HSBC (LSE: HSBA).
Banking stocks have come under pressure in recent times due to macroeconomic volatility. However, it’s also thrown up the opportunity to buy cheaper shares in one of the leading institutions in the world.
The shares look dirt-cheap on a price-to-earnings ratio of just under seven. Plus, a dividend yield of 8% is higher than the rate I’m hoping to get in the example above.
From a risk perspective, current volatility is an issue. Higher interest rates, potential for defaults, and a weak global economy are all issues that could dent performance and returns.
From a bullish view, the long-term focus of the business to capitalise on Asia is a plus point for me. As the region’s wealth continues to grow at a rapid rate, HSBC can leverage its existing dominant position in the area to grow performance and returns.
