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Creating a sustainable and growing second income through investing doesn't require extraordinary skills or inside knowledge. Private investors have a powerful ally: time. With a long-term approach, even modest sums can become a significant source of passive income.
This is how an investor could get started with as little as £2,000 (or even less).
<h2 class="wp-block-heading" id="h-harness-the-power-of-ftse-100-stocks“>Harness the power of FTSE 100 shares
He FTSE 100 The index is a fabulous source of income. Over the long term, investing in a diversified selection of blue-chip UK shares can generate wealth from a combination of dividends and share price growth.
While even large UK companies can be volatile in the short term, history shows that shares outperform most other asset classes over time. A well-constructed portfolio of 15 to 20 FTSE 100 shares is a good starting point. It's key to target trusted, established companies with strong customer bases and consistent dividend growth.
These companies are often better equipped to weather economic turbulence while rewarding shareholders with regular payouts.
cigarette maker imperial marks (LSE: IMB) is a good example for investors to consider. Despite the controversies surrounding tobacco and constant regulatory challenges, it has demonstrated the strength to adapt and survive. The board has worked hard to build strong brands, retain market share and move into next generation products such as heated tobacco and vaping devices.
Investors tend to prefer Imperial Brands for its reliable dividend income stream. Today, the final yield is an impressive 5.8%. That's comfortably above the FTSE 100 average of 3.5%. Although it is not guaranteed. No dividend is.
Imperial Brands' share price has also been rising lately. It has increased 38% in the last year.
stocks are on fire!
After a strong run, there is a good chance that the stock will go dormant. There are long-term threats. A crackdown on vaping could wreak havoc, while smoking rates could continue to decline. However, Imperial Brand has shown great resilience over the years. I personally don't buy tobacco stocks, but investors who do I think could see it as an excellent source of dividends and perhaps some share price growth as well.
Long-term investing is a matter of patience and harnessing the power of compounding. Over the past 20 years, the FTSE 100 has returned an average annual return of 6.9%, including reinvested dividends.
Let's say an investor puts away £2,000 at age 25 and leaves it in the market for 40 years. With that average return, your investment would grow to £28,850 at age 65. A 5.8% return would provide a second income of £1,673 a year. Not bad for a £2,000 investment.
However, investing is not a one-time process. Let's say the same investor invested £2,000 every year for 40 years, under the same growth assumptions. His portfolio would grow to £415,973 by age 65. Withdrawing 5.8% annually would generate £24,126 in annual income. This is a brilliant performance, although inflation will have eroded its purchasing power in real terms.
While the stock market offers attractive growth potential, no investment is without risk. Market returns may not live up to expectations and individual companies may face challenges. Diversification is crucial to reduce the impact of any underperforming stocks.
While £2,000 a year is a solid sum, by gradually increasing it over time, our investor could generate even more impressive rewards.
