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Building a sustainable and growing second income through investing doesn’t require extraordinary skills or insider knowledge. Private investors have one powerful ally: time. With a long-term approach, even modest sums can grow into a significant passive income stream.
Here’s how an investor could get started with as little as £2,000 (or even less).
Harness the power of FTSE 100 stocks
The FTSE 100 index is a fabulous source of income. Over the long run, investing in a diversified selection of UK blue-chip stocks can build wealth from a combination of dividends and share price growth.
While even big UK companies can be volatile in the short term, history shows that equities outperform most other asset classes over time. A well-constructed portfolio of 15-20 FTSE 100 stocks is a good starting point. Targeting reliable, established companies with strong customer bases and consistent dividend growth is key.
These companies are often better equipped to weather economic turbulence while rewarding shareholders with regular payouts.
Cigarette maker Imperial Brands (LSE: IMB) is a good example for investors to consider. Despite the controversies surrounding tobacco, and constant regulatory challenges, it has shown the strength to adapt and survive. The board has worked hard to build strong brands, retain market share and shift into next-generation products such as heated tobacco and vaping devices.
Investors tend to favour Imperial Brands for its reliable dividend income stream. Today, the trailing yield’s an impressive 5.8%. That’s comfortably above the FTSE 100 average of 3.5%. It’s not guaranteed though. No dividend is.
Lately, Imperial Brands share price has been climbing too. It’s up 38% in the last year.
The shares are on fire!
After a strong run, there’s a fair chance the shares could idle. There are long-term threats. A vaping clampdown could wreak havoc, while smoking rates may continue to decline. Yet Imperial Brand has shown bags of resilience over the years. I personally don’t buy tobacco stocks but for those investors who do, I think they might wish to consider this for a brilliant source of dividends and maybe some share price growth too.
Long-term investing is all about patience and harnessing the power of compounding. Over the past 20 years, the FTSE 100 has delivered an average annual return of 6.9%, including reinvested dividends.
Let’s say an investor tucks away £2,000 at age 25 and leaves it in the market for 40 years. With that average return, their investment would grow to £28,850 by age 65. A yield of 5.8% would provide a second income of £1,673 a year. Not bad from a £2k investment.
Investing isn’t a once-and-done process though. Let’s say the same investor put away £2,000 every year for 40 years, under the same growth assumptions. Their portfolio would grow to £415,973 by age 65. Withdrawing 5.8% annually would generate £24,126 in yearly income. That’s a brilliant return, although inflation will have eroded its spending power in real terms.
While the stock market offers compelling growth potential, no investment’s without risk. Market returns may fall short of expectations, and individual companies may face challenges. Diversification’s crucial to reduce the impact of any single underperforming stock.
While £2,000 a year is a solid sum, by gradually increasing that over time our investor could generate even more impressive rewards.
