The London Stock Exchange is currently trading at a discount to most other major international markets. But that is actually great news for investors starting to build a portfolio from scratch today. It means some unusually high dividend yields can be found, which could lay the foundations for a significant second income in future.
Here are the steps I’d take to aim for £10,500 a year in passive income.
First things first
The first part of this wealth-building journey would involve me opening a Stocks and Shares ISA. Then I’d need to start putting money aside to invest in cheap LSE shares.
Now, I’ll be the first to admit that this has become more difficult due to the insidious damage of high inflation. To be honest, I’ve been shocked at some of the price rises for food in the supermarket.
But while things have undoubtedly become harder, I think it’s still possible for most people given enough discipline and focus.
For example, as my own bills have risen, I’ve reduced eating out in restaurants in order to continue squirrelling money away into stocks.
High yields
As I’ve mentioned, I’d look no further than high-yield dividend shares in the UK. As companies have continued to post good earnings and increase dividends, their depressed share prices have pushed up yields.
Today, I can actually find dozens of stocks that are yielding between 7% and 10%. Vodafone, for example, currently has a dividend yield of 10.3%!
Now, I should point out that the telecoms giant has significant debt, which could pose a risk to that dividend at some point. But it does show what is possible if such dividend payments are met moving forward.
As such, I think it’s entirely realistic for me to expect an average 8% return from stocks each year.
With dividends reinvested, that is around the average total annual return of the UK stock market over a long period of time.
Of course, that average return isn’t set in stone moving forward. But in buying cheap high-yielding shares today, I’m hopefully setting the stage for an attractive second income in future.
Getting to £10k in passive income
Here, I’m going to assume that I’m able to save and invest £125 a week into the stock market. That’s the equivalent of £6,500 a year.
A compound interest calculator reveals that investing that amount each year would grow to £131,377 in just over 12 years. This is based on the assumption that I generate an average return of 8% per year and reinvest my dividends instead of spending the cash.
At this point, though, I could stop reinvesting dividends and enjoy a second income of £10,500 from an 8% annual return from my ISA.
Of course, individual dividend payments are at the discretion of a company. So they can always get cut or cancelled, making it important to build a resilient and diversified portfolio.
Luckily there are many firms listed in the UK today that I can choose from. And I’m currently busy adding some of these to my own ISA right now.
