£10,000’s a healthy amount to have tucked away. So if I managed to save up that much, I’d want to make sure I made it work as hard as possible for me. Yes, I could leave it in the bank and pick up a fairly attractive interest rate. But instead, I’d invest in the stock market and start making a second income.
I think over time, that’s the smarter thing to do. When rates fall, so will the amount of interest I receive. The market’s proven over time that investors willing to play the long game are rewarded.
To start making a second income, I’d buy stocks with meaty dividend yields. It’s a method I’ve been using since I started investing. If I had £10,000 stashed away, here’s what I’d do.
Open an ISA
Before I even considered buying any shares, I’d open a Stocks and Shares ISA. Every year, UK investors have up to £20,000 to invest in their ISA. This comes with a handful of benefits. The main one is that any capital gains made or dividends received aren’t taxed.
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.
Buying stocks
So I’ve set up my ISA. Next, I need to decide what sort of businesses I want to invest in. I tend to stick with the FTSE 100. Many of its constituents are well-known companies with massive customer bases operating in large industries. They also tend to offer handsome yields.
Take M&G (LSE: MNG) as an example. It’s a stock I’d buy today if I had the cash. In all fairness, it hasn’t posted the best performance in 2024. During that time, it’s down 6.9%. But I still like the look of its shares.
Its weak outing this year can be pinned down to ongoing economic uncertainty. Inflation’s a lingering threat. High interest rates and the risk of a delay in future cuts are also a detriment to its operations. Due to these factors, investors can pull their money out of funds. We’ve seen this play out over the last couple of years and it’s something to watch moving forward.
But with its 9.5% yield, I’m a fan of M&G. That’s one of the highest payouts on the index. What’s more, since listing in 2019, the business has raised its dividend every year. Dividends are never guaranteed. However, management has said it aims to keep this trend up moving forward.
M&G also operates in a massive industry with strong growth potential. It has good brand recognition and a large customer base (over 5m) alongside 900 institutional customers.
Finally, its shares look like decent value, trading on just 8.5 times forward earnings. That’s below the FTSE 100 average of 11.
Generating a second income
Taking M&G’s 9.5% yield and applying it to my £10,000 would see me earn £950 a year as a second income. That’s not bad. But I’m aiming for more.
That’s why I’d reinvest every dividend I received into buying more shares. By doing so, I’d benefit from ‘dividend compounding’.
By doing that, after 30 years my £10,000 could be generating £15,434 a year as a second income. My initial lump sum would have grown from £10,000 to £170,949. That would go a long way in helping me during retirement.
The post £10,000 stashed away? Here’s how I’d aim for a second income worth £15,434 a year appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p 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 10%, 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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Charlie Keough has no position in any of the shares mentioned. 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.
