Here’s how I’d try to build a second income with £10 a day

Want to build a second income to help with the costs of retirement? Anyone who can use their full £20,000 Stocks and Shares ISA allowance each year should be able to do it.

In fact, more than 4,000 UK investors have already built a million pounds or more that way.

But that’s nearly £55 per day. And most of us can’t do that. What about £10 a day, for a more modest £3,640 a year (or £3,650 this year)?

Regular savings

Long-term investing success needs time and consistency. That means putting cash away regularly, before I spend it.

Most ISA providers these days will let us set up direct debits from as little as around £25 a month.

So my first step would be to open one of these. Next, I’d set up a regular monthly transfer. I’d round my £10 a day up a bit to £305 a month. And I’d set that to go out just a few days after each payday.

Growing returns

What might my £3,660 a year get me? I’d put it mostly into FTSE 100 dividend stocks, each time I built up enough for a buy.

If I could manage, say, a total yield of 7%, that could get me an extra £256 in a year.

Have a nice drink at Christmas from that? Not a chance. It would all stay in my ISA, and get rolled into my next share buys.

Compound it!

And that’s where compounding comes in. You see, next year I could have £3,916 more to invest. And at the end of two years, assuming the same 7% return, I could have £8,107 to start my third year.

Dividends are never guaranteed though. And they’ll probably be up and down in the coming years.

But over the long term, the best companies do seem to pay out the most cash. I’m thinking about names that have been around for decades, and have been near the top of the pile year after year.

Quality yields?

Legal & General, for example, is forecast to pay 7.8%. And British American Tobacco is on 9.8%. Even NatWest Group looks like it’s on for 7.3%.

Glencore offers 7.9%, for a bit of variety. I expect that to be one of the more volatile ones though.

To reduce the risk of not getting my dividends, I’d keep away from firms that pay big yields but also carry very large debt. I don’t see that as very prudent long-term cash management.

For me, that means BT Group and Vodafone would be ruled out.

That’s the plan

So keep my money going in and spread it among top-quality companies in different sectors (to get some safety through diversification).

Then plough all my dividends back in, maybe top up with any spare cash I had, and raise my daily amount as time goes on. And then just sit back.

Not always smooth

I’ll expect some short-term shocks, like 2020 when the average Stocks and Shares ISA lost 13%. But keeping it up for decades has to be the best way to deal with the risk.

The post Here’s how I’d try to build a second income with £10 a day appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Vodafone Group Public. 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.