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Earning second income in the stock market is not easy. Investors must be able to do three important things.
This looks at which sectors are out of fashion for investors, identifies the best stocks in those sectors, and finds out how to get the cash to buy them.
Where are the bargains?
A good way to find out where the best opportunities might be is to look at what investors are concerned about. And this can vary from country to country.
In the US, investor concerns have shifted from inflation to economic growth. In contrast, things are not going well in the UK.
Economic growth has been strong compared to other G7 countries and inflation has briefly dipped below the Bank of England's 2% target. Despite the weak jobs report from August, things are looking good.
Because of that, I look at sectors like health and the consumer base. Stocks can fall when things look good as their growth prospects are usually not that strong.
Affiliate businesses can be a good investment anyway. And they tend to do better than others when things inevitably get tough.
Individual stocks
I think Tesco's (LSE:TSCO) is an exciting UK consumer company. The UK's biggest supermarket is an obvious one, but there are some good things hidden in it.
A major business challenge is the rise of discount retailers. These have been expanding their store base and look poised to compete for market share in the long term (Aldi recently announced plans to open a further 23 stores across the UK by the end of the year as sales and profits rise).
There is no way to completely eliminate this risk. It is worth noting, however, that Tesco has been able to maintain its market share of approximately 27% compared to the last 10 years.
The company will have to work to maintain this position. But the company has done a good job of matching its competitors' prices, making it difficult for Lidl and Aldi to differentiate themselves.
Tesco dividends 2014-24
Created in TradingView
Tesco shares also have an unusually high dividend yield. Other things being equal, that makes it a good time to consider the stock from an income perspective.
Getting money to invest
As you think about stocks, the last part is getting cash to invest. It's easy to overlook this step and it's not always easy, but it's important to get a good return in the long run.
If I invested £100 a month and earned a 5% annual return, I would have a second annual income of £4,040 after 30 years. That's not a bad result, but investing more money can lead to better results.
Investing £150 a month at the same rate of return, would see me up to £4,040 a year five years earlier. And I will be earning £6,060 a year after 30 years.
When it comes to investing, there are no guarantees. But if things go well in the long run, the more I invest regularly, the more I stand to return as a second income.
That's why it's so important to keep investing regularly. That's what turns all the good work in figuring out which stocks to buy into a solid second income.
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