How much would someone need to invest in the stock market to target a £1,250 monthly second income?

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History shows that the stock market can produce some impressive long-term gains. But UK shares have also established a reputation for paying some generous dividends. Indeed, latest forecasts expect members of the FTSE 100 to pay £88bn to shareholders in 2026. The index as a whole is currently (10 April) yielding 2.8%.

With this in mind, how could someone aim for a four-figure monthly income stream?

It’s all about the yield

Well, someone achieving this yield would need an investment pot of £535,714 to generate a monthly income of £1,250, equivalent to £15,000 a year.

One way of achieving this would be to invest £789 a month for 25 years at an annual growth rate of 6%.

However, as much as I remain a fan of many of the dividend shares on the UK’s premier index, I think there are plenty of other exciting opportunities on the second tier. At the moment, the FTSE 250’s yielding 3.9%.

And this marginally higher return makes a big difference. A fund of £384,615 could generate £1,250 a month. Using the same assumptions above, it would require a monthly investment of £566.

But dig a little deeper and it’s possible to find lots of FTSE 250 shares offering a better return than this. Indeed, there are 24 presently yielding 7% or more.

It pays to shop around

One of these is Supermarket Income REIT (LSE:SUPR). In fact, I have the stock in my ISA.

At the moment, it’s offering a return of 7.6%. To generate £1,250 a month in dividends, £197,368 of the REIT’s shares would be needed. At 6% over 25 years, a monthly investment of £291 would realise this.

Of course, it’s never a good idea to have just one stock in a portfolio.

Supermarket Income makes its money from buying large stores and then leasing them to grocery chains. It now has a portfolio worth £2bn. In common with all real estate investment trusts (REITs), it must return at least 90% of its annual rental profit to shareholders through dividends.

With such a high threshold for shareholder returns it’s easy to see why so many income investors like REITs.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Final thoughts

But dividends cannot be guaranteed. If earnings fall then payouts are likely to be cut or — worse – suspended. How could this happen? Well, if interest rates were to rise then Supermarket Income REIT would face higher borrowing costs.  

Its debt relative to the value of its properties is also going up. Having said that, its loan-to-value of 43% (at 31 March) is comfortably below the 60% limit required by its banking covenants. But borrowing costs are rising faster than its income. A lack of access to finance would limit future expansion.

However, despite these challenges, it remains my favourite REIT. It has blue-chip tenants in a sector of the commercial property market that will always need large properties regardless of whether people want to shop in-store or online.

The group also enjoys 100% occupancy with an average unexpired lease term of 12 years. And over 80% of its income is inflation-linked. It also claims to have the lowest cost/income ratio of 12 of the 13 REITs on the FTSE 350. That’s why I think it could be considered by income investors.

The post How much would someone need to invest in the stock market to target a £1,250 monthly second income? appeared first on The Motley Fool UK.

More reading

• £10,000 buys 11,764 shares of this REIT, unlocking £723.49 in passive income

James Beard has positions in Supermarket Income REIT Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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