My job is my primary income source but I believe I could create a second income to enjoy in retirement through investing smartly.
Here’s how I would try to do it.
Steps I’d follow
The first thing I need to do is put in place an investment vehicle. I reckon a Stocks and Shares ISA is the best one for me. This is due to favourable tax implications on dividends received, and a generous £20k allowance per year.
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Next, I need to do the hardest part, which is stock picking. In order to mitigate risk, I’ll diversify my pot of stocks. Plus, I’ll look to ensure I buy stocks that I believe I understand, and have lots of information readily available for me to review.
Quick maths
Let’s say I had £20k saved from my earnings. I’d put this to work to help me build my additional income.
Investing this into my ISA, buying the best dividend stocks, and aiming for an 8% rate of return, after 25 years I’d be left with £146,803. This is due to the magic of compounding.
In order for me to enjoy this, I’d draw down 6% annually, and split this into weekly amounts, which equals to £225.
Pitfalls
The above sounds great in theory but there are potential bumps in the road. The first one is that dividends are never guaranteed.
Moving on, each stock I buy possesses its own risks, which could dampen performance and shareholder returns.
Finally, I may not achieve my target yield of 8%. If I achieve less, I’ll have less money to draw down from and enjoy. Conversely, I may yield more, boosting my additional income amount.
One stock I’d buy
The City of London Investment Trust (LSE: CTY) is one pick I’d buy to help me achieve my aims if I was following this plan starting today. In fact, I’d love to be able to buy the shares as part of my existing holdings when I have the funds to do so.
The investment trust is made up of some of the best blue-chip stocks under one umbrella. Its aim is to outperform the FTSE index and provide shareholder value. Some of the stocks the trust holds positions in are HSBC, Shell, and Unilever.
From a returns perspective, City of London Investment Trust is a Dividend Aristocrat. It’s achieved this esteemed position due to increasing its annual dividend for 57 years straight! However it’s worth mentioning the past isn’t always a guarantee of the future.
Coming up to date, a dividend yield of close to 5% is attractive. Plus, I can see this growing too if the trust continues in the same vein.
Finally, having access to the best UK shares in one pot is a great way to mitigate risk, as diversification offers this in abundance.
From a bearish view, overexposure to British-based stocks could present a problem in the future. Economic turbulence or a market crash could have a material impact on the trust’s performance and shareholder returns.
Overall I reckon the City of London Investment Trust could help me bag consistent returns, and build an additional income stream.
