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I love the idea of generating a second income in addition to my main job, but I can't devote too much time to it. Luckily, I've found a way to generate it with very little effort, by investing in companies that pay dividends. FTSE 100 Index actions.
It takes a bit of effort. It takes a little time to open a stocks and shares ISA, but I can then invest up to £20,000 a year tax-free and transactions only take a few seconds.
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 type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
If I wanted to do the bare minimum, I would simply put my money in a low-cost exchange-traded fund (ETF), such as the UCITS iShares Core FTSE 100 ETFHowever, buying individual stocks is more fun and picking them doesn't feel like work at all.
Fun with FTSE 100 Index earnings
Once I buy them, the dividends and any growth in the stock price accumulate in my account, while I take care of other things.
If I had £10,000 at my disposal today and no shares, I would spread the risk. I would do this by dividing the cash equally between five blue-chip companies with a strong track record of paying dividends and which also offer share price growth.
One FTSE 100 stock I would love to buy right now is an insurance company. Aviva (LSE:AV) is an established UK company, not a spectacular growth company. However, its shares have risen by 25.32% over the last 12 months.
The real draw is the dividend. The stock has a cumulative dividend yield of 6.92%, bringing the 12-month total return to 32.24%. However, Aviva looks to be a good value trading at just 12.68 times earnings.
Share performance is cyclical. Good years can follow bad ones, and vice versa. Aviva's share price was stagnant before the recent surge and could stagnate again. Since I'm investing for a 25-year time frame, I'm willing to accept the ups and downs.
Income opportunity
So far, so good. First-quarter general insurance premiums rose 16% year-on-year to £2.7bn, while health and protection sales rose 5% as more Britons took out private health insurance to avoid NHS waiting lists. Its wealth management division is on the up, with net flows up 15% to £2.7bn.
Sales of private annuities have increased due to higher current interest rates, but that could reverse once central bankers start cutting them.
While I wouldn’t invest all my £10,000 in Aviva, let’s use that 6.92% yield as a benchmark. It would pay me a passive income of £692 in the first year. If I reinvested all my dividends, I’d have £53,269 after 25 years. Any rise in the share price adds to that, so I could end up with a lot more. On the other hand, dividends could be cut. Shares could fall. That’s investing.
Let's say I also invested £500 a month over that 25-year period. In that case, I'd end up with £454,394, assuming the same 6.92% yield. When I started collecting my dividends, I'd get a second income of £31,444 a year, which equates to £2,620 a month.
Obviously, profits are not guaranteed and all of this takes time, but it requires surprisingly little effort for the huge income I can potentially earn in return.
