Owning UK shares is a proven way to build wealth. Given enough time, a portfolio of high-quality stocks can deliver returns to unlock an impressive second income.
However, there’s a popular misconception that you have to be wealthy to invest in the stock market. That’s simply not true. Even if I only invest £500 a month, that’s enough to aim for a second annual income of almost £62k.
Here’s how.
Investing for growth
The UK’s premier stock market index is the FTSE 100. However, the FTSE 250 may be more suitable for investors seeking growth.
Why’s that? Because this index contains smaller-sized firms with greater growth potential than the big beasts of the blue-chip index.
We can see this in the numbers. Since its inception in 1992, the FTSE 250 has delivered an average annualised total return (including dividends) of around 10%. That’s compared to the FTSE 100’s total return of about 7.5% over the same period.
A big difference
Now, this long-term trend isn’t guaranteed, nor are dividends. The average could end up being less (or more).
Meanwhile, returns do vary year to year as bear markets can quickly turn into bull markets, and vice versa.
But let’s assume the indexes continue to deliver these averages and I invest £500 a month. This is how that would play out over 30 years.
FTSE 100
FTSE 250
5 Years
£36,048
£38,309
10 Years
£87,800
£100,007
20 Years
£268,759
£359,400
30 Years
£641,722
£1,032,199
As we can see, that measly 2.5% variation actually makes a huge difference when compounded over three decades. I’d end up with £1,032,199!
At this stage, I could follow the 4% rule to withdraw £41,287 each year from my portfolio.
Alternatively, I could generate a regular income stream through dividend shares, potentially preserving or even growing my nest egg. In this scenario, a 6%-yielding portfolio would be paying me £61,931 a year.
Were this a Stocks and Shares ISA portfolio, this income would be totally tax-free.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Unique intellectual property
One FTSE 250 stock I hold and would still include in this portfolio is Games Workshop (LSE: GAW).
This is the firm that designs and manufactures miniature figures and tabletop war games, including Warhammer 40,000, which is now 37 years old and in its tenth edition.
This makes the firm’s intellectual property vast and rich. It spans books, comics, video games, merchandise, and more.
The firm has also granted exclusive rights to Amazon to produce films and television series set within the Warhammer 40,000 universe. Henry Cavill, a Warhammer superfan, is set to star in and produce the adaptations, though the two companies are still thrashing out “creative guidelines”.
One risk here is squeezed consumer budgets, especially as more than 1.5m UK homeowners are due to renew their mortgage deals at higher rates throughout 2024. And those plastic figurines aren’t cheap.
As thing stand though, the company is performing wonderfully. Yesterday (30 July), it reported record annual sales, profits, and dividend payments.
On a constant currency basis, core sales jumped 13.9% year on year to £507.4m. Core business operating profit increased by £37.4m to £185.6m, representing an incredibly healthy 36.5% operating margin.
Looking ahead, Games Workshop says it “aims for many more years of profitable growth”.
The stock isn’t cheap, trading at 24 times earnings, but I’m backing it to keep on winning long term. It also offers a 4% dividend yield.
The post How I’d invest £500 a month in UK shares to target a £61,931 annual second income appeared first on The Motley Fool UK.
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More reading
2 stocks that are untouchable in my Stocks and Shares ISA
How to invest £1,000 in an ISA and aim for a second income of £171,523
£5,000 in savings? Here’s how I’d start investing in FTSE shares today
How I’d invest £10k in a SIPP to target £28,000 annual passive income
2 top growth shares I’d buy for the second half of 2024!
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben McPoland has positions in Games Workshop Group Plc. The Motley Fool UK has recommended Amazon and Games Workshop 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.
