Interested in a second income stream? Here’s how I would build one

Rupert Hargreaves lays out his top tips for building a second income stream with investments.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Do you want to build a second income stream? Of course you do. By having a second income stream you can quit the rat race and pursue your dreams without having to worry about working to pay the bills.

In this article, I’m going to explain how I would build that second income stream from stocks and use this income stream to retire comfortably.

Setting the target

The first step is to work out how much income you need. This will vary from person to person. But for this article, I’m going to use the UK’s current median weekly wage of £569, or £29,598 a year, according to the Office for National Statistics. For simplicity, I’m going to round the number up to £30,000 a year. Assuming a 4% yield, I calculate you will need a starting pot of £750,000 to achieve this level of passive income.

For investors just starting on their second income journey, this goal might be a bit unrealistic. So, I’ve tailored the advice below in a way that’s suitable for investors of all experiences and levels of wealth. 

No matter how much money you have to start with, the template below can help you achieve a second income.

Building the pot

As we’re trying to achieve a steady, predictable income stream, I think it’s best to pick blue-chip dividend stocks, companies like Royal Dutch Shell, BP, HSBC, and British American Tobacco. Also, I think a simple FTSE 100 tracker fund will complement this selection of blue-chips perfectly. Together, these slow and steady income stocks should produce a yield on your investment of between 4.5% and 6%.

If you want to build a steady income stream for life, equities are by far the best way because company dividends are usually increased every year. This means your income will rise steadily with inflation, so the purchasing power of your money will be preserved.

I also think if you’re looking to build a second income stream, a small percentage of your portfolio should be in bonds. Bonds don’t have the same attractive qualities as equities, but when it comes to predictable income, they’re unrivalled. If you use a low-cost bond fund get access to this asset class, today you can get a yield of between 3% and 5% on your money.

Lastly, I would recommend including a small number of mid-cap stocks in your income portfolio. 

I think it’s always important to have some mid-caps in a portfolio because they generally have a much higher potential for dividend increases and capital growth. The average dividend yield from these investments is usually lower, but dividend growth over the long term more than offsets the low initial yield. You can probably get a dividend yield of between 2% and 3% without taking on too much risk.

Asset allocation 

When combined, blue-chip stocks, bonds and mid-caps can give you a hands-free income for life. 

Personally, I use an allocation of 70% towards dividend-paying blue chips, 20% towards bonds and 10% towards growth stocks. I calculate this gives me an annual yield on my money of 4.6% from a portfolio that should continue to generate returns in all environments. 

That’s the strategy I recommend if you are interested in building a second income stream.

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.

Rupert Hargreaves owns shares in Royal Dutch Shell and British American Tobacco. The Motley Fool UK has recommended HSBC Holdings. 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

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »