Leveraging the wealth-building benefits of the stock market is a fantastic way to start earning a second income stream. And while it takes money to make money, frugal saving can often supply the capital needed to get the ball rolling. That’s especially true for those who’ve already amassed £250,000 in the bank.
Obviously, most Britons don’t have a quarter of a million pounds lying around. However, according to the latest figures from HMRC, there are currently around 253,000 ISA accounts with at least £250,000 or more as of October 2024. And that number’s been steadily rising over the years.
So with that in mind, let’s see how these six-figure savings can instantly be transformed into a £20,750 passive income.
Dividends from an index fund
One of the easiest ways to enjoy a stock market second income is to rely on dividends. These payments typically happen once a quarter and don’t require investors to take any action beyond holding shares. This is especially true for index fund investors who don’t even need to worry about portfolio or risk management.
Today, the dividend yield of the FTSE 100 – the most popular British index – is 3.4%. So all investors have to do is throw their £250,000 into a low-cost index fund, and that’s an £8,500 passive income stream secured overnight. And over time, this income could grow as many of Britain’s largest businesses steadily boost shareholder payouts.
That’s not bad, but investors can do better if they’re willing to take on a bit of extra risk.
Hunting higher yields
While the average yield of the FTSE 100 may only be 3.4%, there are plenty of constituent stocks offering considerably more. For example, Legal & General (LSE:LGEN) currently has a yield of 8.3% — the highest in the index. And throwing £250,000 in the direction of this insurance giant would unlock a second income of £20,750 instantly!
So job done? After all, Legal & General has a long track record of hiking its dividend every year since 2009, excluding the pandemic in 2020. Well, not quite.
Indeed, Legal & General’s dividend has historically been robust. But that doesn’t guarantee this trend will continue. The business is highly sensitive to macroeconomic factors, particularly interest rates and the general health of the British economy. That’s because it carries a lot of investment assets in its own portfolio.
A downturn in the economy or financial markets could prove problematic for profits and, in turn, dividends. On the other hand, an ageing population across the UK, US, and Europe creates a nice tailwind for the business. This creates a structural demand for the group’s annuities, making it easier to secure future growth. Yet, at the same time, relying on financial products like annuities introduces notable longevity risks for the business if customers end up living longer than expected.
The point is that a high yield almost never comes risk-free. And looking at Legal & General, there are plenty of risks that income-seeking investors need to consider carefully.
