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Investing regularly in the stock market can be a great way to generate a second income. Over a long enough period of time, the results can be extremely satisfactory.
During the last 20 years, the FTSE 100 has obtained an average return of 6.89% per year. That's enough to turn a monthly investment of £500 into something that generates £2,310 a month.
Diversification
One of my favorite things about regular investing is that it avoids a difficult dilemma. The problem revolves around diversification.
On the one hand, I want a diversified portfolio. Owning shares in companies from different sectors and geographies helps limit the effect of something that could be a problem for any of them.
However, by the same token I am reluctant to buy stock in a company just because of what it does or its location. I prefer to focus on the best opportunities available to me.
Investing regularly solves this problem because opportunities will come and go over time. So I may focus on one or two stocks this month because other things might do better in the future.
Long term investment
One feature of investing over the next 30 years is that I can give the stocks I buy today time to develop. And that allows me to consider opportunities that I might not be able to consider on a shorter time horizon.
Diploma (LSE:DPLM) is a good example. The business has grown impressively and I think its prospects for continuity in the future look quite good.
The company is a distributor of industrial components. And while some of the markets it sells into may be cyclical, the company itself enjoys relatively stable demand.
This is because Diploma focuses on affordable but essential products. As a result, customers are unlikely to refrain from purchasing them even when budgets are tight.
Perspective
Diploma's growth model is based on acquiring other companies and growing them. This may involve increasing sales by expanding into new markets or expanding margins by reducing costs.
The company has much of what I look for in a quality investment. Over the past 10 years, it has retained about 44% of its profits and reinvested them to drive future growth.
In doing so, Diploma has consistently maintained a return on equity of over 15%. That implies that the investments the company is making are generating a good return on the cash it is investing.
The big question is how long the organization can continue doing this. But with a market capitalization of £6bn, I think it will be a long time before acquisition opportunities start to dry up.
Return on investment
Turning £500 a month into something that generates £27,720 a year requires 30 years of returns in line with the historical performance of the FTSE 100. That is by no means guaranteed.
To give myself a chance, I would look to focus on quality companies with long-lasting growth prospects. And a long-term approach gives me the opportunity to consider businesses like Diploma.
Based on its current earnings, the stock looks expensive. But with potentially three decades of growth ahead, there's an opportunity to look at it long term.