Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing in UK shares.

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With £10 per day, I could buy a couple of takeaway coffees, or a Tesco meal deal or two. Alternatively, I could look to build a second income stream to enjoy in my golden years.

Let me break down how buying dividend-paying UK stocks could help me achieve this if I had £10 to spare everyday starting from now.

Two core tasks

There are two main things I need to do in order to achieve the plan I’ve set out above. These are explained below.

  1. Choose an investment method. I’m going to pick a Stocks and Shares ISA. This affords me a couple of luxuries. Firstly, I’ve got a £20K yearly allowance, in case I’m able to put more than £10 per day in. Secondly, I don’t need to pay tax on dividends, which is ideal as I want to maximise my pot of money.
  2. Stock picking. Diversification and quality dividend-paying stocks will help me here. I want to buy stocks with a good track record, but also businesses that have an element of future-proofing in terms of their earnings and investor return prospects.

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.

Crunching numbers

So how do I go from cutting out my favourite coffees to an additional income stream? Well, £10 per day equates to £70 per week. Over a year, I’d be investing a total of £3,640.

Now, I’m going to follow this plan for 25 years. As I’m looking for the best quality stocks, I’m aiming for a rate of return of 7%. After my 25 years, I’d be left with a grand total of £245,776.

In order for me to enjoy this, I’ll draw down 6%, which is a yearly amount of £14,746. Going a step further, that’s a monthly figure of £1,228, which is a tidy sum for me to enjoy when I’ve retired. Plus, by this point I won’t have to worry about my mortgage as it will be paid off.

It’s worth remembering that dividends are never guaranteed. Plus, I’m aiming for a return of 7%. The stocks I buy may not pay out this much, so I could be left with less in my pot for me to enjoy.

A stock to help me achieve my aim

So what types of stocks would I buy if I were following this plan? Well, financial services giant Legal & General (LSE: LGEN) fits the bill for me.

A chunky forecast dividend yield of over 8% is very attractive. Plus, the shares look great value for money on a price-to-earnings ratio of just under 10 right now.

The business has been looking to provide great shareholder value in recent times. This has been through increased dividends, as well as share buyback schemes. A healthy balance sheet has supported these endeavours.

However, from a bearish view, economic issues have hurt demand for insurance and investment products. This is something that could dent payouts if it were to continue now, or occur again in the future.

Overall, I reckon Legal & General is the type of stock that could diversify my holdings, and help maximise my pot for my second income stream.

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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