How much would I need to invest in income shares to earn £400 a month?

Are income stocks the best way to generate second income? I think. By holding these shares, I receive dividend payments into my investment account like clockwork. I own part of the company, so I can share the company’s income.

And since I live in the UK, I can easily buy lots of very good income stocks. At FTSE 100 the index is full of companies that have a long history of delivering good dividend payments to their shareholders.

For example, I want to target £400 per month from my income shares. Here’s how much I need.

How many shares will I get?

The first step in my calculation was to figure out what I would expect from my income shares. An easy way to do this is to use annual results. This is the percentage I get back on my investment over the years.

So if an income share has a 3% annual yield, for every pound I invest I will get back 3p. If I hold £1,000 of shares with an annual return of 3%, I will receive a dividend of £30 a year.

The average dividend yield of the FTSE 100 is 3.5 %. That may be the least, as it includes growth stocks that may not pay dividends as well as income stocks. That’s right total The historical return for the FTSE 100 is 8%. If we look at it FTSE 250more like 10%.

Income stocks, which deliver returns to shareholders in the form of dividends taken out of the company’s earnings, tend to fall somewhere between these figures. Some of the most traded UK stocks are: Sainsbury’s with an annual yield of 5.23%, Legal & General with 7.41% yield, and Rio Tinto with a yield of 6.98%.

Actual percentages vary, but I believe it can yield 6%. Of course, dividends are not guaranteed and it is common in economic downturns like 2008 for all to be cut.

Do I prefer to generate cash

The £400 a month I’m aiming for adds up to £4,800 a year. So the amount I would need to invest at 6% to return £4,800 a year is £80,000. I know people who have spent a lot on a deposit for a house, but using it to generate cash back appeals to me more.

It is still an amount of money that most people will not have just lying around. A good strategy to implement is to save savings or disposable income. This is something I’ve been doing for years and it’s great to see the total build over time.

The trick is to reinvest the dividends down the road, which will grow your investment faster. This is where we see the real magic of compound interest, the “The eighth wonder of the world” as some say.

And if I reach £400 a month? It will be very tempting to keep reinvesting to get higher income from my stocks. This can give me financial stability, future income in addition to my pension, or even open the door to early retirement if I want.