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I think it is entirely possible to create a second income by investing in FTSE shares.
To achieve this I would follow some specific steps that I will break down below.
Simple approach
Nobody likes complications, and I am no different, especially when it comes to investing. With this in mind, I will take a simple approach when it comes to my investment vehicle and stock selection.
I will be opening a stocks and shares ISA. This is because of the favourable tax implications as well as the generous £20,000 annual allowance.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
Next, I will be buying shares in this ISA that I believe are blue-chip and sector leaders. I will also be diversifying my share portfolio as this is a great way to mitigate risk.
Risks I should consider
When investing in dividend stocks, I must remember that dividends are never guaranteed.
In addition, each individual stock carries its own risks that could affect performance and profitability. I must take these into account for any stock I decide to buy.
Finally, I have a monetary goal and return in mind. However, if I earn less than my target return, this will affect how much additional income I can generate.
Quick Maths
If I had £15,000 available today, I would put it all into my ISA with the intention of buying dividend-paying stocks. I will stick to my plan for 30 years and aim for an 8% rate of return.
The magic of compounding interest will help me turn my £15,000 into £462,107 after 30 years. The next step is to withdraw 6% per year and divide it into weekly instalments, which equates to £530 per week.
Stock selection
A stock I would buy if I followed this plan would be Legal and general (LSE: LGEN).
He FTSE 100 Index This financial services giant is dedicated to financial planning and retirement products. In addition to vast experience and broad coverage, the company has a good track record of performance and profitability. However, I understand that the past is no guarantee of the future.
What I like about Legal & General's modus operandi is the fact that it operates in a booming sector. Demand for retirement and financial planning products is only increasing, in line with the ageing population. Also, when consumers invest in such products, they tend to be long-term products. This can help Legal & General to achieve good results with good earnings visibility.
From a bearish perspective, economic turbulence can be worrying for a couple of reasons. First, during tougher times, consumers may spend less on non-essentials, such as future financial products, as they are struggling with a cost-of-living crisis. This can hurt performance and payouts. Also, if the economic outlook worsens significantly, dividends may be cut. Legal did this during the 2008 financial crisis.
Turning to the other side of the coin, Legal & General’s fundamentals look good to me. The cherry on top is an impressive dividend yield of 9% at present. To put that into context, it is higher than my 8% target I mentioned earlier.
