I plan to build a second income from my investments so I can live a more comfortable life come retirement. My chosen method to achieve this is by buying UK shares.
There are plenty of ways to make extra cash outside of work. But I see buying dividend shares as one of the simplest. Equities, given the time, are capable of turning a small investment into a substantial nest egg.
Not everyone starts with a lump sum or savings. But that’s not an issue. By looking at the bigger picture and investing for the long term, I’m more likely to succeed in achieving my goal. For me, that’s a 30-year timeframe. Of course, this varies depending on an individual’s situation.
On top of that, there are methods I can use to grow my pot more quickly. While I’m working, I’ll reinvest the dividend payments I receive from the companies I own. This will allow me to benefit from compounding, which means I’ll make gains on the interest I earn and my initial investment. When I retire, I can then use these funds to top up my State Pension and any potential earnings.
I’m looking to invest around £200 a month. Here’s how I’d go about it.
Picking the best
My plan is to have my money tied up in the stock market for as long as possible. And while everybody should keep some cash to hand for emergencies, my savings are best put to work in the market.
With that, I need to decide where I want to put my money. That’s where the FTSE 100 and FTSE 250 come into play. The UK’s leading indexes are home to some of the best-performing and most exciting companies. What’s more, many businesses are keen to return value to shareholders. The average FTSE 100 yield is around 4%, which beats most benchmarks worldwide.
A comfortable retirement
For me, I like to pick out shares that yield above 5%. Of these, I own names such as Lloyds, which yields 5.4%, Legal & General, which offers 7.8%, and British American Tobacco, which is the third-highest on the index at 9.6%.
While it’s smart to diversify across a range of companies and sectors, using those three as an example gives me an average return of around 7%. That’s in line with the average FTSE 100 return since its inception. With a £200 a month investment, by year 30, I’d be generating a second income of £16,400 a year. My investment pot would be worth £244,000.
If my portfolio did better and returned 10% on average every year, as I’d hope, I’d have a pot something closer to £452,000 generating £42,700 a year!
Of course, that’s a best-case scenario. I’m fully aware that the stock market is unpredictable. The companies I own could scrap their dividends, or their shares could crash. As much as I wish I could, I can’t predict the future. However, I like to remain optimistic.
There are additional steps I could take to bolster my returns, such as topping up my monthly payments. By doing this, I’m confident that I’d enjoy a much more comfortable retirement.
The post Here’s how I’d turn £200 a month into a second income for retirement appeared first on The Motley Fool UK.
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Charlie Keough has positions in British American Tobacco P.l.c., Legal & General Group Plc, and Lloyds Banking Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. and Lloyds Banking Group 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.
