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Are revenue shares the best way to create a second income? I think so. By owning such shares, I receive dividend payments in my investment account like clockwork. I own a part of the company, so I can share the profits of the company.
And because I live in the UK, it’s easy for me to buy shares of a lot of great income stocks. He FTSE 100 The index is packed with companies that have a long track record of delivering excellent dividend payments to their shareholders.
Let’s say I wanted to target £400 per month from my revenue share. This is what you would need.
How much will my shares earn?
The first step in my calculation is to find out what I get from my revenue shares. An easy way to do this is by using the annual yield. This is the percentage I get from my investment for a year.
So if an income stock has a 3% annual return, for every pound I invest I would get 3 pence. If you had £1,000 worth of shares with a 3% annual return, you would receive £30 in dividends per year.
The average dividend yield for the FTSE 100 is around 3.5%. However, it is likely to be on the lower end, as it includes growth stocks that may not pay dividends as well as income stocks. Actually, the total historically, the return of the FTSE 100 is 8%. If we look at the FTSE 250it’s more like 10%.
Income shares, which deliver returns to shareholders in the form of dividends drawn from the company’s earnings, tend to fall between these numbers. Some of the most traded UK stocks are Sainsbury’s with an annual return of 5.23%, legal and general with its yield of 7.41%, and red river with its yield of 6.98%.
The actual percentage varies, but I would feel confident that you could achieve a return of 6%. Of course, dividends are not guaranteed and it is common for them to be cut entirely in economic downturns like the one in 2008.
Why I prefer to generate a cash return
The £400 a month I’m aiming for adds up to £4,800 a year. So the amount you would need to invest at a 6% return to generate £4,800 per year would be £80,000. I know people who have spent so much on a down payment on a house, but using it to generate a cash return appeals to me more.
It’s still an amount of money that most people won’t just throw away. A good strategy to achieve this is to inject savings or available income trickle down.. This is something I’ve been doing for years and it’s great to see my full development over time.
The trick is to reinvest my dividends along the way, which will make my investments grow faster. This is where we see the real magic of compound interest, the “The eighth wonder of the world” as some call it.
And once you hit £400 a month? It’s going to be very tempting to continue reinvesting the returns to earn an even bigger income from my shares. This can offer me financial stability, a future income along with my pension, or it could even open the door for me to retire early if I want to.
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