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I believe it is entirely possible to generate a second source of income by investing just £5 a day.
Adding £5 over days, weeks, months and years could add up to quite a bit of money. Plus, I'd be making my money work by investing in dividend-paying stocks. FTSE stocks.
Let me explain how you could accomplish this if you had money to spare right now.
Rules of engagement
I need an investment vehicle, so I'm opening a stocks and Shares ISA. This way, I don't have to pay taxes on capital gains and dividends.
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, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Next, I need to invest my money in dividend-paying FTSE shares that have attractive yields, strong fundamentals and bright future prospects. These elements are key, since dividends are never guaranteed. Additionally, I would like to diversify my portfolio to have a little protection.
Breaking down the numbers, £5 a day equates to £35 a week. Over 52 weeks this is a total of £1,820. I'm going to aim for a 7% rate of return. This is the average rate of return of the FTSE 100 in recent times.
In 20 years, I will have accumulated £79,145.09.
I will then withdraw 5% and split it monthly which equates to £329.77.
This is a long-term plan to accumulate a fund and use this money when I retire. By then I will have paid off my mortgage. Plus, my kids will no longer depend on mom and dad's bank. This way I can enjoy this extra money, as well as other investments, to live life to the fullest in my last stage of life.
I am aware that the rate of return I hope to achieve may not materialize. On the other side of the coin, the exchange rate could also go up!
banking giant
An action that I think could help me with my goals is HSBC (LSE: HSBA).
Banking stocks have come under pressure of late due to macroeconomic volatility. However, there is also the opportunity to buy cheaper shares in one of the world's leading institutions.
The stock looks very cheap with a price-to-earnings ratio of just under seven. Additionally, a dividend yield of 8% is higher than the rate I expect to earn in the example above.
From a risk perspective, the current volatility is a problem. Higher interest rates, the possibility of defaults and a weak global economy are issues that could impact performance and returns.
From a bullish point of view, the business's long-term focus on capitalizing on Asia is a plus for me. As the region's wealth continues to grow at a rapid pace, HSBC can leverage its existing dominant position in the area to increase performance and returns.
