A second income can spell the difference between struggling to make ends meet and taking a few extra holidays a year. Many people dream of building additional income streams but feel it would require too much time and effort.
Well, I think the UK stock market provides lots of opportunities to get started. And it’s never too late. Even with as little as £10k to invest, it’s possible to start building towards a meaningful flow of extra monthly cash.
The trick is in picking the right stocks. High-growth, tech stocks, dividends — what’s the best option?
The truth is, there are benefits and pitfalls to all types of shares. However, when it comes to passive income, reliable dividend stocks tend to tick all the right boxes.
Calculating returns
A savvy investor with a keen eye for top-performing companies has the potential to build a portfolio that returns 10% or more per year.
Consider a portfolio of stocks on the FTSE 100. Some may offer high growth potential while others focus purely on offering value through dividends. A mix of the right stocks can be expected to pay an average 6% dividend yield with around 5% annual share price growth.
By adopting a dividend reinvestment programme (DRIP) to compound the returns, £13k invested in that portfolio could grow to £140,000 within 20 years. That amount would pay annual dividends of £11,350 if the average yield remained at 6%. By the end of the following year, the dividends would equate to well over £1,000 a month.
A great stock for second income
One good example of a stock that fits the above criteria is Primary Health Properties (LSE: PHP), an investor in modern UK healthcare facilities. It boasts an impressive dividend yield of 7.2%, with a reliable track record of payments. It’s also a real estate investment trust (REIT), so it offers the added bonus of a tax break for investors.
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Admittedly, its price has fallen in the past few years. However, between 2010 and 2020, when the market was more stable, it grew 120%. That equates to annualised returns of 8.24%. If interest rates drop and the housing market experiences a resurgence, it’s realistic to expect average share price growth above 5% per year.
But profit margins are already down to 16% from 36% last year and it has quite a lot of debt. If the market doesn’t recover, the company may have to issue equity to raise funds, which would dilute shareholders and hurt the share price.
Diversity is key
The above risks highlight why it’s important to diversify into various industries and sectors.
Similarly, investors could choose to buy shares in an investment trust. These work for a more hands-off strategy as they tend to have low volatility and stable returns. Examples include JPMorgan American Investment Trust, up 800% in the past 20 years, or Monks Investment Trust, up 637%. They may not pay high dividends but their growth speaks for itself.
But as always, remember: past performance is no indication of future results!
