£10,000 in savings? That could become a second income worth £6,946

This Fool’s already thinking about a second income for later life. With £10,000 of savings, here’s how he’d get things moving in the right direction.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Millions of Britons are thinking about how they could earn a second income. It’s not just me.

Investors have become more conscious that they need to get their money working. With inflation reaching double figures last year, it makes sense.

I always argue that I don’t need to be investing purely in dividend stocks today if I want to generate a passive income in 20 years’ time.

Personally, I invest in a mixture of growth-oriented stocks and dividend-paying stocks to advance my own wealth. After all, it’s worth remembering that the growth stocks of today could be the big dividend stocks of the 2040s.

What I’d buy

There are three ways I like to break this down. Firstly, a good proportion of my investments are growth-focused. These are the companies that drive my portfolio.

My investments in stocks such as AppLovin, Celestica, Nvidia, Powell Industries, and Abercrombie & Fitch have all grown by around 100% over the past 12 months alone.

However, growth-focused investments often carry more risk. Thankfully, my success rate has been high, but I have a couple of underperforming investments. From being up around 35% in February, I’m now down 35% on the Chinese EV maker Li Auto. It’s very volatile.

The second part of this portfolio mix is investing in growing dividends. This can mean choosing companies with a track record of increasing their dividend payments, or just companies we think will prosper over the long run.

It’s worth remembering that the dividend yield’s always relative to the price we paid for the stock.

For instance, if an investor picked up Lloyds‘ (LSE:LLOY) stock 20 months ago with a 5.75% dividend yield, they’d currently be receiving close to 7.5% annually as the dividend payments have increased.

And finally, there are the big dividend payers like Legal & General and Phoenix Group. These stocks don’t tend to offer much in the way of share price growth, but these 8%+ dividend yields can compound nicely.

How much could I make?

Focusing in on Lloyds, my forecasts have the share price growing by roughly 5% annually over the medium term. Meanwhile, the dividend yield currently sits around 5% — there’s room for growth here with a dividend coverage ratio of 2.75.

And while Lloyds shares have surged in recent months, it’s worth recognising that the stock still trades with a considerable discount to its international peers — namely those in the US.

Investors are still cautious about the UK economy. Brexit, the interest rate environment, and a stagnant economy still weigh on the share price and represent near-term risks.

As a cyclical investment with 68% of loans being UK mortgages, Lloyds isn’t the stock for investors who don’t believe in a brighter future for Britain. However, the forecasts for the UK economy and Lloyds are pretty strong.

Using some fairly conservative estimates, I believe a £10,000 investment in Lloyds today could compound at 10% annually — share price gains and dividends.

In turn, this would give me £6,946 annually as a second income in 20 years.

Despite this, my preference is to spread my money evenly among investments. Diversification helps mitigate risk.

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.

James Fox has positions in Abercrombie & Fitch Co., AppLovin Corporation, Celestica Inc, Legal & General Group Plc, Lloyds Banking Group Plc, Nvidia and Powell Industries, Inc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Nvidia. 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.

More on Investing Articles

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »

Investing Articles

Unilever: a passive income stock with potential for decades of dividend growth

Stephen Wright thinks Unilever can keep reducing its share count for years to come. And this should help make it…

Read more »

Middle-aged black male working at home desk
Investing Articles

Worried about retirement? I’d buy high-yield dividend shares to build wealth

The number of pensioners enduring poverty in the UK looks set to rise. Investing in dividend shares could help Britons…

Read more »

Investing For Beginners

2 boring but beautiful FTSE 100 stocks to add to my ISA

Jon Smith runs over a couple of FTSE 100 stocks that he really likes the look of, even though they…

Read more »

Investing Articles

Here’s how I could supercharge my wealth by snapping up the best dividend stocks!

This Fool explains how dividend stocks play a crucial part of her aspirations to build wealth, and details one pick…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Revenue up 10% and accelerated growth potential for this overlooked FTSE 250 company

Today's first-quarter update from this good-value FTSE 250 company keeps me keen on the stock as recovery and growth continues.

Read more »

Investing Articles

Here’s why I’m so bullish about the BT share price now

The BT share price shot up after FY results, and a couple of months on it's still up there. Might…

Read more »