Many stocks in the FTSE 100 pay high dividends every year. The right ones will generate a surprisingly large second income from a surprisingly small investment in a surprisingly short time!
My current favourites in this regard are NatWest, Phoenix Group Holdings, M&G, and Glencore. I hold the first two of these stocks. And I would happily buy the remaining two if I did not already have other holdings in their sectors.
Small beginnings
Based on last year’s dividend and the current share price, these have respective yields of 12.8%, 10%, 9.7%, and 9.5%. This gives an average of 10.5%.
I could save £5 a day by simply not having that extra fancy coffee or pint of beer. That may not sound like the beginnings of a life-changing sum. But over a year it adds up to a staggering £1,825!
With an eye to the future, all this money would be invested in my (hopefully) 10.5%-yielding stock portfolio.
The magic of compounding
All dividends paid from each stock would be reinvested. And just as with compound interest, this will have a startling multiplier effect on my money.
With no further saving beyond the initial £1,825, my money could double after six years. This is providing the average 10.5% on the portfolio remained in place.
After 11 years, the initial investment would have tripled on that basis. And after 17 years, the portfolio would be making over £1,000 a year in second income.
Factoring in the FTSE
My returns might be much higher, much quicker, though. From its creation in 1984 to the end of 2022, the FTSE 100’s overall price return was 645.2%. This equates to 5.3% on an annualised basis.
If this return was factored into the four-stock portfolio, the investment could be making over £1,000 per year after just nine years. And after 26 years, it could be making over £1,000 in second income every month.
Five years after that, the total pot could be just under £200,000 to provide over £27,000 per year in second income!
Huge pension boost
According to UK government figures, a ‘moderate’ retirement can be enjoyed on an annual income of around £23,300. This would be more than funded by the 31-year returns of the portfolio model above.
However, adding in the current State Pension of £10,600 per year gives a figure of £43,000 per year. This is £5,000 more than the amount required to enjoy a ‘comfortable’ standard of living, according to the government.
That said, looking ahead over this timeframe, inflation would certainly reduce the spending power of these funds. Yet for its part, the government currently operates the famous triple lock for the State Pension. This is a guarantee that it will rise at least in line with inflation, in order not to lose value.
Of course, on the investor’s part, inflation can be mitigated by doing two things. First, continue to save into a high-yielding portfolio every year. Second, increase the amount saved in line with inflation.
The post A second income of £1,000 a month for £5 a day? Here’s how! appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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More reading
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I’d buy 6,000 shares of this FTSE 100 stock for £100 in monthly passive income
Simon Watkins has positions in NatWest Group Plc and Phoenix Group Plc. The Motley Fool UK has recommended M&g Plc. 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.
