Generating a second income from stocks is far easier than many people imagine. The key ingredients are research, consistency, and patience.
Through these, even someone starting with no savings at 35 can build towards a substantial passive income over time. Here’s how.
Consistency
Before even thinking about which investments to buy, it’s wise to consider opening a Stock and Shares ISA. These wonderful accounts shield any returns from tax obligations, making it far easier to build wealth.
However, with the annual ISA contribution limit currently at £20,000, it’s unlikely most people starting from scratch can invest that much every year. That equals a chunky outlay of £1,666 each month.
For argument’s sake then, let’s assume someone starts investing with a more modest sum of £500 each month. If this was achieved regularly, with an average 8% return each year, the portfolio would grow to £454,718 after 25 years.
In other words, a person starting from scratch today at 35 could have nearly half a million pounds by the time they turn 60. From just £500 a month!
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Caveats
Now, as nice as this sounds, there are a few caveats here. The first is that while 8% is the ballpark total return figure for UK stocks long term, this isn’t guaranteed. On average, the stock market goes up roughly seven out of every 10 years. But that’s not set in stone and nether are individual dividends.
Moreover, the figure assumes any dividends received are retained and not spent. Ideally, they should be put back into buying even more shares. I also haven’t included any account and trading fees in the calculations. These can add up, especially if a platform charges for every trade.
With these caveats out the way, let’s look at how much income someone might expect from a £454,718 portfolio.
Passive income
Again, this is hard to know for sure, but let’s assume the ISA was yielding 7% by the end of the period. In this scenario, an investor would be receiving £31,830 every year in tax-free dividends. To go from nothing to this would be quite incredible.
And it would obviously be even higher if our investor increased the monthly payments over time. For someone investing an average of £800 a month, the yearly passive income would be £50,928.
That’s the sort of figure that might support less work or even early retirement!
A FTSE 100 blue-chip
One FTSE 100 stock I rate and think is worth considering for a beginner portfolio is Coca Cola HBC (LSE:CCH). A major bottler for the master Coca-Cola brand, it sells brands including Fanta, Sprite and, of course, Coca-Cola (and others like Monster energy drinks) across parts of Europe and Africa.
Sales growth has been in the double digits for years, while dividend growth’s also been solid. The forward-looking dividend yield is a decent 3.4%, supported by solid profit margins.
In the near term, things could get tricky if inflation spikes again, as this could put pressure on consumers, especially in emerging markets.
But the long-term growth prospects look very strong here. Especially as the firm’s agreed to buy a 75% stake in Coca‑Cola Beverages Africa, which will create a global bottling giant across multiple emerging markets.
The share price is down 10.3% since August, opening a dip-buying opportunity I reckon investors should think about taking.
