£20,000 in savings? Here’s how you can use that to earn a second monthly income
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There are many different ways to identify a second large and common income. I like the idea of investing in dividend stocks and using the income to reinvest to grow my portfolio. Later, I hope to use income-paying stocks to pay for my living expenses and comforts in retirement.
My portfolio mainly consists of blue chip quality stocks from FTSE 100 again FTSE 250. We’re talking about companies with decades-old business models, strong balance sheets, and a logical approach to paying large and growing dividends over time.
My strategy is not a big secret. But it’s one that can generate life-changing income down the line.
Getting started
The first question you should ask yourself is: how much do you need to invest to get a healthy income to live on? The truth is, there is no universal answer to that question.
It depends on which stocks the investor decides to buy, and the returns they make. It also comes down to the length of time they stay invested – the longer you’re in the market, the bigger your pot should be.
But let’s use history as an example to get an idea. Let’s say we have someone who can earn a typical annual return of 9%. That’s bang in the middle of the long-term average of 8% to 10%. We will assume they do this for 25 years until he retires.
How much money do they get each month if they invest £20,000 in a Stocks and Shares ISA?
Trembling up
After that 25-year period, they’ll have £188,168 sitting in their ISA, and it’s all tax-free. If it had been invested in 7%-dividend-yielding shares, they would have had a second annual income of £13,172, or just under. £1,100 month.
That’s not a small amount to help pay for retirement expenses. However, is it a number you can be happy with? It’s not something I can be happy about. As the future of the State pension becomes more and more uncertain, I personally oversee more than this.
And I do this by gradually investing in the stock market. The additional improvements this provides to the integration process can be significant. And here I will show you how.
Able to invest up to £20k again an extra £300 a month? Over the same 25 years and the same return of 6.79%, that nest egg would grow to £524,505. An ISA of this size would then pay dividends worth £36,715 a year, or £3,059 month.
What can you invest in?
But what should you buy to generate that kind of secondary income? I like the unique benefits it brings HSBC (LSE:HSBA) down for years.
Since 2015, it has provided – through a combination of capital gains and dividend income – an average annual return of 14.7%. If this continues, this FTSE 100 the stock alone can significantly balance other underperforming parts of my portfolio.
But what are the chances of HSBC shares continuing their incredible run? In my opinion they are extremely powerful. That is why I hold the bank in my portfolio.
Although it faces increasing competition from rival banks, I am confident that its strategy to approach emerging markets will bring great returns. And with a strong balance sheet, HSBC has plenty of money to invest in growth while continuing to pay market-beating dividends.
