Investing £1,000 a month for 10 years at an average annual return of 5% can result in a second income of £7,120 per year. And I think 5% is highly achievable.
There are a couple of rules investors need to pay attention to. But earning passive income through the stock market isn’t just for those with huge amounts in savings.
Invest regularly
The key to going from nothing to £7,210 per year is investing regularly. A great way of doing this without relying on cash in the bank is by using part of a monthly salary.
Setting aside £1,000 per month and investing it is the most important thing. Being willing to look for opportunities whether the market is up or down can be crucial.
That isn’t always easy – when share prices are up it can be tempting to wait for them to come back down. And when stocks have been falling it’s natural to wait for signs of a recovery.
Neither of these is a good idea, though. Stocks that have gone up may not come back to their previous levels and fallen shares moving higher means the best time to buy may have passed.
Be opportunistic
Different stocks are popular with investors at different times – this is what creates buying opportunities. One of the best examples of this is Meta Platforms (NASDAQ:META).
Meta is in a good position – the company is performing well and it’s at the leading edge of the artificial intelligence movement. But things weren’t looking so positive 18 months ago.
In November 2022, Meta was burning cash through its Reality Labs division, losing users on Facebook, and Apple was threatening its ability to track its users. How times have changed.
The stock’s price-to-earnings (P/E) ratio has gone from 11 to 29 over that time. It’s not so attractive to buy right now, but the point is even the best businesses are cheap sometimes.
Putting it all together
So where should investors look now? My pick for a 5% yield would be Primary Health Properties (LSE:PHP) – a FTSE 250 real estate investment trust that leases GP surgeries.
The stock is down 12% since the start of the year, meaning the dividend yield is actually 6.7%. But I think investors are overestimating the risks with the business.
The biggest reason for concern with the stock is its debt. Every time the prospect of interest rate cuts moves further into the future, the share price comes down.
I think the market is overestimating the danger. The risk of unpaid rent is low, demand is strong, and issuing shares to fix the balance sheet would leave the dividend yield fairly high.
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Getting started
With no savings, I’d use £1,000 of my monthly salary to buy 1,095 shares in Primary Health Properties. This would get me started on the way to earning a second income.
I’d look to build a diversified portfolio over time. But I think the best way of doing this is by taking advantage of the best opportunities I can find each month.
