A decade ago, earning a second income by investing in the stock market was considered a side hustle for the wealthy.
Nowadays, all that’s needed is a smartphone and as little as £10 (or less) a day. Sure, Wall Street still talks a big game, throwing the word ‘billion’ around like it’s small change. But in truth, lucrative investment opportunities are no longer the reserve of the fat cats.
So how can the little guy (or girl) earn a tidy bit of extra cash in this day and age?
Choose quality shares
Since this is a long-term strategy, I’d choose shares of well-established companies with a history of reliable performance. In other words, the opposite of volatile artificial intelligence (AI) tech stocks or speculative assets like crypto. I’m talking Tesco, Unilever or GSK, businesses that people use every day and are likely to continue doing so.
Take Aviva (LSE: AV.), for example. As the largest general insurer in the UK, it’s well-established with a £12bn market-cap and £18.5bn in revenue last year.
Its dividend yield is currently 7.5% and typically averages around 5%. Over the past four years, the share price has grown 48.8%, with annualised returns of 10.4% a year.
However, it can be volatile. In 2022, the stock fell 40% only to climb 47% the following year. In addition to that, it faces another risk. The UK insurance industry is highly competitive, with Prudential, Phoenix Group and Legal & General all jostling for market share. If an aggressive rival pushes down premiums to attract customers, Aviva may need to sacrifice profits or risk losing out.
Overall, it enjoys steady growth and has a good track record of paying dividends. So I would say it is a decent option to consider for an income portfolio.
Cost-cutting
Scraping together an extra tenner a day should be easy enough. When I used to live in London we joked that as soon as you left your front door, £50 was gone (often more!).
Staying in just one night a week can make the difference between building a second income or living paycheck to paycheck.
Another way to cut costs is to reduce tax obligations. UK residents can do this by investing via a Stocks and Shares ISA. This allows up to £20,000 a year invested with a tax break on the capital gains.
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.
Compounding returns
Ten pounds a day is £3,650 a year — not exactly life-changing savings. But through dividend investing and the miracle of compounding returns, it could be.
Consider a well-constructed portfolio that returns 6% a year, slightly above the FTSE 100 average. With a focus on high-yield dividend stocks, the same portfolio could aim to receive an additional 5% return in dividends.
By putting £10 a day into that portfolio and reinvesting the dividends for 20 years, the pot could grow to £266,830. If the average yield held, it would pay £12,000 a year. At that point, I could start withdrawing my dividends for a second income of £1,000 a month.
But if I kept going for another 10 years, the pot could reach a massive £825,430. The dividends then? £37,680 a year, or over £3,000 a month!
This post was originally published on Motley Fool
