The recent macroeconomic turmoil has perfectly demonstrated the advantage of having a second income stream. Apart from building wealth, earning some extra cash on the side provides greater financial security. And one of the easiest ways to achieve this, in my opinion, is through investing in the stock market.
In fact, with just £500, it’s possible to start earning some passive income right now. Here’s how.
Building a second income stream
The London Stock Exchange is home to a vast range of income opportunities for investors to capitalise on. And investors don’t even need to be an expert to get started.
Thanks to the invention of index tracker funds, novice investors can immediately build a diversified income-generating portfolio with a single transaction. In the UK, the FTSE 100 is one of the oldest indices around. And since it contains the largest British enterprises, it’s a popular choice among income investors. After all, these firms are typically less volatile and pay more dividends.
Even after enjoying a rally in the first half of 2024, this flagship index still offers a dividend yield of 3.6%. So by investing £500 today, investors can immediately start earning £18 each year.
Growing dividends
Needless to say, an extra £18 in the bank isn’t going to be life changing. However, in the long run, it can start to grow into something more meaningful.
Over the last 10 years, dividends in the FTSE 100 have grown by an average annualised pace of roughly 2%. Assuming this expansion continues at a similar pace for the next 20 years, today’s 3.6% yield may reach 5.4%. All things being equal, the £18 second income would then be worth £27 – 50% higher.
During this time, by reinvesting dividends paid along the way and keeping the capital gains, the total annual return could land at around 8%. At least, that’s what’s happened historically. And growing £500 at 8% for 20 years translates into an investment worth £2,463, generating a £133 second income – 640% higher than the initial starting point.
Investing directly for dividend growth
The results delivered by the FTSE 100 are nothing to scoff at. But there are plenty of companies that put it to shame. Take a look at Safestore Holdings (LSE:SAFE). The UK’s leading self-storage provider has a highly cash-generative business model that’s enabled it to expand its real estate empire, especially when interest rates were near 0%.
This has translated into impressive growth in both the share price and dividends. In fact, combined, shareholders have reaped an average annualised return of 21.5% over the last 10 years! And if this performance were to continue over the next 20, £500 today could be worth £35,470. This would generate a £1,420 second income when following the 4% withdrawal rule. That’s 7,790% higher than the initial £18.
Risk and reward
As exciting as these prospects sound, it’s essential to realise that none of these gains are guaranteed. Safestore isn’t operating with near-0% interest rates these days, and the FTSE 100 may not continue to deliver the same returns as seen throughout history.
In other words, it’s possible to end up with considerably less than expected. Regardless, it goes to show that earning a significant second income, even with modest sums, is possible in the stock market, providing risk is kept in check.
This post was originally published on Motley Fool
