Generating a significant second income gives me more choices in life. It can allow for a career change to a more satisfying but less-well-paid job, perhaps. And later, it can enable an earlier and better retirement.
Rising housing and other costs may have left many people with little or nothing in the bank. But with a share investing plan, something could be done about it.
Even saving a little regularly and reinvesting the returns can add up to something substantial surprisingly quickly.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
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The saving could come from not having that extra cup of takeaway coffee or pint of beer in a day. In much of the UK, that £5 adds up to an incredible-sounding (but true) £152 a month, or £1,825 a year.
The magic of compounding
What is important is compounding any investments. This means earning returns on the original investment and the previous returns made.
The FTSE 100 has many high-quality, high-yielding stocks in which to invest. NatWest, Phoenix Group Holdings, and M&G are three, with respective dividend payouts currently of 13.3%, 11.01%, and 9.8%. I hold the first two and would buy M&G now if I did not have other investments in the sector.
The average yield on these three stocks is 11.37%. At this rate and investing just £152 a month (plus reinvesting all returns), the total pot would be worth just under £39,000 by 2033.
By 2043, it would be just over £146,000, making around £16,600 a year in income. And by 2053 it would be just under £414,000, making about £46,958 a year.
There is always a risk here, of course, of another major financial crisis at some point. This could lead to a period of reduced dividend payouts from FTSE 100 stocks.
Even in a regular trading environment, stock prices change constantly, and there is the risk that they lose value. Additionally, yields alter over the short term along with share prices, and long term with changing annual dividend payments.
On the other hand, there could be significant share price appreciation over whatever period the shares were held. This would boost returns even more dramatically.
Factoring in FTSE 100 returns
From the creation of the FTSE 100 in 1984 to the end of 2022, the overall price return was 645.2%. This equates to 5.3% on an annualised basis.
Added to the 11.37% average yield, makes 16.67%. Again, the share prices and yields can be expected to change over time.
With this extra boost, by 2033 the total pot would be about £53,159, paying around £8,861 a year income.
By 2043, it would be around £291,585, yielding around £48,607 a year. And by the beginning of 2053, it would be a whopping £1,203, 208. This would give an income of just over £200,000 a year.
The effects of inflation would reduce the buying power of the pound over the years. However, the investment pot above does not include any money from the UK State Pension.
Currently, it is £10,600 a year, and is guaranteed to rise under the ‘Triple Lock’ commitment. This is a pledge to increase the figure by whichever is highest of average earnings growth, consumer price index inflation, or 2.5% every year.
