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He FTSE 100 it’s a good place to look for undervalued stocks with strong returns; that’s my opinion, and that’s why FTSE 100 stocks are well represented in my portfolio.
Naturally, if I want to create a second source of income, I need to invest in stocks that pay dividends. Let’s say I’m aiming for £5,000 a year. So you would need £50,000 invested in stocks paying 10%, which is possibly risky, or £100,000 invested in stocks averaging 5%. That’s ‘safer’ but requires more cash.
Instead I would commit and aim for an average of 7% on £70,000. That’s certainly achievable, though it still requires considerable startup capital.
Reaching £70,000
Not everyone has £70,000 lying around. So what you could do is start with a smaller sum, say £20,000, and invest that in shares that pay 7% over 10 years. Every year I reinvested my dividends and every month it brought in about £170.
After 10 years, he would have £70,000.
This is a compounding returns strategy. It’s worth noting that the longer you keep doing this, the more money you should have (as long as my investment doesn’t lose value, which is always a possibility). The growth is exponential. After 30 years of the strategy, you would have £380,000.
Create a second source of income
If I’m trying to get the highest and most sustainable return, I would spread my investments across multiple stocks. I would probably invest in quite a few companies. But today I am exploring just three FTSE 100 stocks that I would use to create a second source of income.
Phoenix group holdings is a savings and retirement business that offers a yield of 8% and has a dividend coverage of 1.7. Amazingly, it has 13 years of consecutive payouts and investors benefit from steady dividend growth. It’s certainly not the most exciting business (share price growth reflects that), but the insurer expects to generate around £1.2bn of cash generation from organic and incremental new business in 2022.
I would then buy legal and general. The firm, as part of a five-year plan announced in 2020, aims to increase the dividend by a low to mid-single-digit percentage each year. In 2021, the annual dividend increased by 5%, and the same was done with the 2022 interim dividend.
Legal & General is a well run company and I don’t expect it to have to cut its dividend as Direct line. Dividend coverage was 1.85 in 2021, and I don’t expect that number to come under too much pressure in the future.
I own these two shares, and recently bought both, but I don’t own my third pick, red river. Miner has performed extremely well over the past few months, and I want to buy at a slightly better entry point than what we are seeing now. However, the long-term outlook for this dividend-paying miner is positive.
The industry can be hampered by many things, including strikes and bad weather. However, metals are in increasing demand in this age of electrification and infrastructure development. For example, citi Analysts say that copper demand will increase by 7 million tons between 2021 and 2030.
Rio offers a yield of 6%. So, taken together, these three companies could give me an average return of 7%. That’s enough to turn £70k into £5k a year.
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