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If I had known much earlier in life that investing regularly today could help me create a second source of income for tomorrow, I would have started much sooner.
In my opinion, it is still possible to start today. Let me explain how I would approach it.
Game rules
Let's say I have a lump sum of £15,000 to invest today. I'm also going to invest £250 a month from my salary. I save and invest every month anyway, so this is doable.
Firstly, I need to choose an investment vehicle. I think a stocks and shares ISA is an obvious choice as I wouldn't have to pay tax on any dividends I receive. Dividends are essential to growing my fund.
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.
The other thing is to make sure I pick the right stocks, so I have the best chance of maximizing my returns. I'm going to target the best dividend-paying stocks. I look for established companies, with good track records of returns, as well as strong future prospects. I think that between 5 and 10 stocks should work for me.
Let’s do some maths. If I invest a lump sum of £15,000 and add £250 a month to it for 25 years, aiming for an 8% return, the magic of compounding would leave me with £347,859.
I would then withdraw the 6%, leaving me with £20,871. As a weekly figure, that translates to £401.
However, there are risks to consider. First, I must remember that dividends are never guaranteed. I could end up with a lower rate of return, which would reduce my final amount. Also, all stocks carry individual risks that I must also consider.
A stock I would buy
If I were carrying out this plan today, Solar Pension Fund (LSE:FSFL) is the type of stock I would love to buy to help me maximize returns.
As its name suggests, the company invests in solar assets, with coverage in the UK, Spain and Australia.
The company's assets generate clean electricity, which is then sold to energy companies. There is currently a huge emphasis on clean energy and moving away from traditional fossil fuels, and I believe this will only increase. Foresight could be in an excellent position to capitalize and deliver excellent returns to shareholders.
Foresight stock currently offers a dividend yield of 8.8%, which is higher than my target of an 8% return rate. Additionally, the company has increased dividends for the past nine consecutive years. However, I understand that past performance is not necessarily an indicator of future events.
From a bearish perspective, Foresight has a considerable amount of debt on its balance sheet, which could make payment levels difficult in the future. The biggest issue for me is the difficulty surrounding new solar farms. The complexity of land-related regulation for such farms, as well as the high expense, make me wonder if it will be easy to achieve consistent growth and profitability.
In summary, Foresight ticks all the boxes I would look for in a stock I would buy to help me create an additional income stream.
