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With rising interest rates squeezing the buy-to-let market, investors are looking elsewhere for secondary income. And I think the stock market is a good place to watch right now.
By investing using a Stocks and Dividends ISA, I think £20,000 in investments that would pay out £4,116 a year – or £343 a month – is a reasonable aspiration. Here is the way.
Statistics
A 5% compounded annual return on £20,000 results in an investment earning £4,116 a year after 30 years. I think that is true, given the historical benefits of FTSE 100but long waiting time.
Achieving a higher average annual return can speed up the process, however. For example, achieving a compounded return of 6% per annum results in a portfolio generating £3,324 per annum after 23 years.
With an average annual return of 8%, the term is up to £343 semi-monthly compared to 5%. Compounded at 8% per annum, £20,000 turns into an investment that yields £4,351 a month after 14 years.
Nothing is guaranteed when it comes to investing. But it's important to note that the difference between earning 5% and earning 8% can be huge when it comes to reaching £343 a month.
Strategy
Given this, I think it's important to aim for the best overall return. And this includes looking at the most attractive opportunities across the board, rather than focusing on growth or profits.
Obviously, ambition is a second income. But I don't think that means I need to focus exclusively on stocks in companies that distribute their earnings as dividends.
There are two reasons for this. One of the best opportunities may not be in equity shares – and the cost of paying low returns over time to reach £343 a year can be very high.
Another thing is that I don't need a business to split the cash for a second income. If the companies I own shares in are growing and maintaining earnings, I can always sell part of my stake to see the growth.
A stock to consider
In some ways, having an unlimited universe of stocks to choose from makes it difficult. But one that I think looks attractive at the moment Diageo (LSE:DGE).
Over the past decade, revenue has grown at about 4% per year and earnings per share at 5%. And this happened while the company returned most of its free cash to investors as dividends.
Growth is not without risk, however. The company recently proved that it is not immune to the economic downturn as some investors thought that weak consumer spending was the necessary weight.
This has been a problem for companies across the board, however. And I think Diageo's scale gives it an edge over smaller competitors which should put it in a good position for the long term.
Opportunistic investment
Whether it's growth or income, investing well comes down to seizing special opportunities. That means buying shares in strong businesses when prices are unusually cheap.
Right now, I think Diageo fits the bill. That's why I own the stock and why I plan to keep buying it while the price stays near its current levels.
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