Investing £10K in UK stocks could earn me a second income of £8,295 annually!

Building another income stream to enjoy in my golden years is an aim of mine. UK stocks can help me do that. Here I’ll explain how.

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I often think about my retirement and how I’ll fund my lifestyle. Investing in quality UK stocks now could help, in my view.

Let me explain how following a carefully devised plan could help.

Rules of the game

Let’s say for the purposes of this article I have £10K to invest right now. I would put it all into a Stocks and Shares ISA. Buying dividend shares within this vehicle means I don’t have to pay a penny in tax on dividends earned! Plus, I get an annual allowance of £20K if I am able to invest more in the future.

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.

In addition to my £10K, I’m going to invest a further £100 per month.

I want to buy stocks that offer me a good rate of return, a decent track record, as well as positive future prospects too.

Getting into the maths, investing an initial £10K, as well as £100 per month for 25 years, aiming for a rate of return of 7%, would leave me with £138,261.

Next, I’m going to draw down 6% annually, which equates to £8,295. This is a tidy sum, if you ask me, especially as I’ll no longer be supporting my children, and my mortgage will be paid off too.

That all sounds good in theory, but it would be remiss of me not to mention potential pitfalls. Firstly, dividends are never guaranteed. Second, all stocks come with risks that could hamper my investment pot. Finally, I might not achieve a 7% rate of return.

On the other hand, my stocks might yield more, which means I’d be left with more money!

One stock I’d buy to help achieve my goal

British American Tobacco (LSE: BATS) could be a great stock to help me build my second income stream, in my view.

The tobacco giant has been around for a long time with immense brand power, a wide reach, and a stellar reputation for investor rewards.

British American Tobacco shares are down 6% from 2,554p at this time last year, to current levels of 2,397p.

Tobacco stocks have fallen out of favour with many investors in recent years. This is related to the ill-effects of smoking on health. Plus, anti-smoking sentiment is higher than ever, with global governments also getting involved more actively. This could mean regulations could change, and British American Tobacco’s performance and returns are impacted.

Despite the above mentioned issue, British American Tobacco – and its tobacco counterparts – still make cash hand over fist. A part of this is due to non-tobacco alternatives such as vapes surging in popularity and offsetting weaker sales in traditional tobacco products.

Plus, I reckon banning smoking altogether, or introducing laws which may impact sales to a level whereby tobacco firms can’t reward investors, could take decades. There’s still plenty of time for investors like me to bag dividends, in my view.

Finally, a dividend yield of close to 10% is huge, and would go a long way to boosting my pot for my aims of an additional 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 recommended British American Tobacco P.l.c. 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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