With an £8K lump sum, I could create an annual second income worth £5,347

This Fool explains how a second income is achievable by using a lump sum, investing in stocks, and the magic of compounding.

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I want to secure my future, and create a second income stream I can enjoy in my golden years ahead. I believe this is entirely possible with some careful steps.

Let me illustrate how I’d approach this if I had an £8K lump sum to start with today.

Rules I’d follow

First things first, I need to decide on a mode of investment. A Stocks and Shares ISA is the best fit for me. A big reason for this is the fact I wouldn’t need 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’d deposit my money and look to start buying quality dividend-paying stocks. I’m aiming for a diverse set of stocks with a good rate of return, future dividend prospects, and ideally a good balance sheet.

A track record of dividends is also a positive. However, as the past is not a guarantee of the future, I won’t solely rely on this.

Moving onto some maths, I’m not going to add anything other than the £8K lump sum for this exercise. I’m going to aim for a rate of return of 8.5%. If I left this to compound for 25 years, and reinvested dividends, I’d be left with £66,843.

For me to enjoy my additional income, I’m would need to draw down 8% annually. That would give me a yearly income of £5,347.

I must note a couple of caveats. Firstly, dividends are never guaranteed. Plus, while I’m aiming for 8.5% as a rate of return, I may not achieve this, leaving me with less money at the end. Conversely, I could achieve a higher rate, leaving me with a better pot to enjoy!.

Healthcare properties

One stock I would love to buy if I was executing this plan is Assura (LSE: AGR). Set up as a real estate investment trust (REIT), the healthcare property provider must return 90% of profits to shareholders in exchange for tax breaks.

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.

The shares are down 20% over a 12-month period from 50p at this time last year, to current levels of 40p.

This drop is due to volatility, including inflationary pressures and higher interest rates hurting the wider property sector. A direct impact of this has been lower net asset values (NAVs). This is also the main risk that could hurt the business at present. Higher rates make it harder to borrow money. This is the main way REITs like Assura stimulate growth by buying new properties and renting them out.

From a bullish view, Assura’s defensive ability is hard to ignore. Healthcare is a basic requirement for all, and the population in the UK is only increasing. Assura is primed to grow performance, presence, and payouts for years to come, in my view.

Plus, as it rents out many of its provisions to the NHS, chances of defaults are virtually non-existent. Furthermore, the length of tenancies is usually longer, providing this business with a stable income.

Finally, a dividend yield of 8.2% is very attractive for me and my aims of an additional income.

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.

Sumayya Mansoor 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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