Wouldn’t we all like an extra £50 in our pockets every day from a second income? Just keep investing in top UK stocks, and compound our way to the £18,300 per year that needs, right? And that could even cover leap years, paying £1,525 per month on average.
Historically, the FTSE 100 has delivered long-term average annual returns of around 4.9% above inflation. Right now, things look a bit messed up on that front — with stock markets unusually energetic, and inflation causing quite some pain.
But if we think about the long term — and that’s all we can really do — it hints at needing a pot of around £373,500. Draw down the 4.9%, and leave the rest to keep up with inflation — that would be the idea.
Cautious investors might prefer to take out less, while others might want to spend more and reserve less. It’s entirely up to each individual.
How can you get there?
“Someone’s sitting in the shade today because someone planted a tree a long time ago”
— Warren Buffett
Like a nice old tree, it’s going to take some time to build up a pot like that.
How long depends on two things — how much money is stashed away each month, and how much is earned every year. So let’s pick a couple of examples — the average annual 6.9% from the FTSE 100 over 20 years, and a more aggressive (but riskier) 10%.
The following table shows how it might go with two different monthly investment amounts — both aiming for that £373,500 target.
| Monthly investmet | Annual return | Time to target |
|---|---|---|
| £500 | 6.9% | 24 years, 7 months |
| £1,000 | 6.9% | 16 years, 11 months |
| £500 | 10% | 20 years, 5 months |
| £1,000 | 10% | 14 years, 6 months |
Long-term income stock
Aviva (LSE: AV.) is one of my favourite FTSE 100 dividend stocks. It has a forecast 6.2% dividend yield, and that could contribute nicely to an investor’s second income.
The share price has climbed 55% over five years, though I expect that to be something of a one-off. Aviva has gone through a dramatic restructure, and I expect future share price gains to be lower. Still, it wouldn’t take much to match the index average 6.9% per year in total.
Billionaire investor Warren Buffett also famously suggested: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.“
That’s especially true with an insurer, I think, because they tend to be hurt by any stock market pressure. There could be volatility ahead.
How about that 10?
Right now, Greencoat UK Wind has a forecast dividend of 10.2%. And the company reckons it should be able to keep it going. Beware, though, that the big yield comes partly from a five-year share price fall of 23% — wind energy is so out of favour these days. And any failure to meet the expected dividends could hurt.
I reckon investors looking for a second income could to well to consider both of these stocks, in a diversified ISA.
