Here’s how I’d create a second income worth over £20k annually

I’m looking to create a second income by investing in FTSE stocks.

Let me explain how I believe this is possible through dividend investing.

My approach

A crucial aspect of my plan is to use the best investment vehicle possible. As I’m aiming for dividends, a Stocks and Shares ISA is the most effective, in my view. This is because of favourable tax implications on dividends received, as well as a £20k allowance per year.

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.

Next, I need to ensure I’m buying the best dividend shares for me to build a pot of money. I’ll conduct careful research before buying any stocks. I’ll look at things like financial health, returns track record, future prospects, performance history, as well as industry standing.

Taking into account risks, firstly, dividends are never guaranteed. Plus, each individual stock comes with its own risks that could hurt payouts. Finally, I’m going to aim for a certain level of return to maximise my money. However, I could earn less, which could reduce the money I’ll end up drawing down from.

The maths

Crunching some numbers, I reckon it’s crucial to have some structure to my plan. If I was doing this today, I’d kick things off with £10k, if I had it to spare. Plus, I’d add £300 per month from my wages.

If I followed my plan for 25 years, and aimed for an 8% rate of return, I’d be left with £358,709. I’d then draw down 6% annually, which equates to £21,522 annually for me to spend on what my heart desires.

Stock picking

A stock I already own, and I reckon could help me achieve this plan, is Primary Health Properties (LSE: PHP).

I like Primary shares for returns for a few key reasons. Firstly, it’s set up as a real estate investment trust (REIT) which means it must return 90% of profits to shareholders.

Next, it deals in defensive properties, like GP surgeries and other healthcare provisions. These possess defensive aspects as healthcare is essential no matter the economic outlook.

Thirdly, it has a fantastic rate of return at present, a 7% dividend yield. Furthermore, it has paid a dividend since 2000. However, I do understand past performance is not a guarantee of the future.

Finally, the firm’s presence, earnings, and returns could grow as demand for healthcare is only increasing linked to a growing and ageing population in the UK.

As I said earlier, all stocks come with risks, and Primary is no different. One issue is that of recent staffing issues in the healthcare sector. This is linked to pay and working condition disputes that have led to an exodus of professionals out of the industry, or to other countries. Primary could have the assets to grow, but organisations like the NHS not having relevant qualified staff to staff facilities could hurt Primary’s growth and earnings.

Another issue is that of economic volatility. REITs use debt to fund growth and buy new assets. Debt is costlier when interest rates are high, a bit like now.

Despite challenges, Primary looks like a great stock for me to buy for returns and growth.

The post Here’s how I’d create a second income worth over £20k annually appeared first on The Motley Fool UK.

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Sumayya Mansoor has positions in Primary Health Properties Plc. The Motley Fool UK has recommended Primary Health Properties 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.