Here’s how I’d build a chunky second income with £500 a month

Our writer is dreaming of building a second income. Here’s how three large-cap stocks could help him do it in just 10 years time.

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Cost-of-living pressures (and a desire to work less!) have me dreaming about building a second income. Now, that could be a side hustle or second job, but I’ve been thinking about stocks.

The goal for me wouldn’t be to retire completely. I’m just looking to build a nest egg from a few stocks and build a £3,500 dividend income stream in 10 years’ time.

Choosing my stocks

My focus for this exercise is on large-cap stocks in the FTSE 100. Many large companies are dividend paying and I think they offer more price stability versus small caps.

One of those that I like is National Grid (LSE:NG.). This utilities company has a 5% dividend yield (after accounting for its 7-for-24 rights issue), which is quite handy. National Grid is a leader in the electricity and gas sector, and I like the typically stable profile of utilities companies.

Of course, there are no guarantees when investing. National Grid could slash dividends or face longer-term challenges from reduced reliance on natural gas.

With diversification in mind, I think I’d also add J Sainsbury (LSE:SBRY). Supermarket retailing is a low-margin game, but demand tends to be relatively stable in the Consumer Staples sector.

While it is the second-largest UK supermarket chain, rising input costs and a cash-strapped consumer are risks I’d need to consider when buying Sainsbury’s. However, with a 5% dividend yield, it’s one that I think could help me build a second income.

Finally, my third pick for this portfolio would be GSK. One of the world’s largest pharmaceuticals companies, GSK currently has a 3.9% yield and is a market leader in its sector.

GSK isn’t without its challenges. Large research and development costs, and potential lawsuits (including for its discontinued Zantac heartburn medication) are things that I would be watching.

Building a second income

Having chosen my three stocks, I wanted to bring the portfolio together. To keep it simple, let’s look at an equally weighted portfolio. The weighted average yield of these three stocks would be around 4.6%.

Now, £500 a month may not seem like a lot, but the key is compound interest and reinvested dividends. These really do the heavy lifting to accelerate those potential gains.

Starting at zero, and adding £500 per month with a 4.6% yield reinvested at year end, the numbers quickly add up.

By the end of year one, that hypothetical portfolio would be worth £6,776, and a 4.6% yield gives me a second income of £311. Admittedly, not much to write home about.

However, let’s look at five or 10 years down the line.

At month 60, the portfolio is worth £34,902, with a £1,605 annual income. At month 120, that portfolio is worth £77,981, with a £3,587 annual income.

Key takeaways

Clearly, this is a simplified example based on the current yields of these large-cap stocks. Prices will move, dividends will change, and many other factors will affect the end result.

However, the point here was to see some rough numbers. It’s given me some hope that I can successfully build a £3,500 second income with a bit of hard work and diligent investing in dividend shares.

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.

Ken Hall has no position in any of the shares mentioned. The Motley Fool UK has recommended GSK and J Sainsbury Plc. 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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