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I have been investing in stocks and stocks since 1986-87, when I was a freshman in college. Starting with next to nothing, my goal was to turn my small income into a large amount of capital. Therefore, for the last 35 years, my wife and I have been accumulating our stocks. But now is the time to think about turning this extra capital into a second income.
Four forms of second income
As a freelancer, the easiest way for me to generate a second income would be to recruit more clients. But the problem with this earned income is that it stops when I stop working. Therefore, I prefer passive income: earnings that I earn without extra work or effort.
Alternatively, you could deposit a lump sum and collect interest on the savings from this pot. But even the best savings accounts only pay out about 3.5% a year in deposits. And I know few people who got rich by saving cash.
My third option might be to buy government and corporate bonds. These debt securities pay a fixed interest rate and then pay me back the principal when they mature. For example, a six-month US Treasury bond pays a fixed rate of 5.13% per year (and is one of the safest investments around).
But buying bonds as a retail investor can be cumbersome and complicated, and some brokers just won’t let me do it. But if I were a safety-first investor looking for low-risk products, high-quality bonds would absolutely be on my radar today.
A fourth option would be to purchase an investment property by making a deposit and obtaining a buy-to-let mortgage. Then you could rent this house out to tenants and cash in on the net income after expenses. But I really don’t like owning it, especially after hearing horror stories from friends in this field.
My number 1 choice for passive income for life
My favorite route to generating income from capital is by buying dividend-paying stocks. But the company’s dividends are not guaranteed, so these cash payments can be reduced or canceled at any time. To reduce risk, I spread my pot across a wide range of companies and industries.
In my opinion, the UK’s elite FTSE 100 The index is packed with quality businesses whose stocks are undervalued and also pay decent dividends. So my wife and I have been investing heavily in these cheap stocks. In addition to dividend income, our goal is to earn long-term capital gains by selling stocks at a profit.
When I peruse the Footsie today, I see a wide range of offerings in sectors such as asset management and insurance, banking, oil and gas, mining, telecommunications, and more. In some cases, dividend yields on these stocks can exceed 7% per year, and at least 20 Footsie shares pay more than 5% per year in cash.
But is it realistic for me to generate a substantial second income simply by relying on blue chip UK stocks? I think it is, given that FTSE 100 companies are expected to pay out a record £85.8bn in dividends in 2023 alone. Wow!
In summary, based on our current progress, we expect to have this new passive income up and running in the second half of this year. So watch this space.
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