Forget buy to let: I’d target a sizeable second income with UK stocks!

For many investors, earning double income is the main goal. One way to do this is by investing in stocks that pay dividends. These companies reward shareholders on a regular basis, often every month or two – but be aware that dividends are not guaranteed.

Another option is investing in stock price growth. This can be a riskier strategy. Especially if I focus on growth stocks. As we all know, few companies deliver the growth they promise.

So dividend paying stocks are the way forward for me. Let’s see how this can be done.

Stock up on brick and mortar

I bought a property a few years ago and started renting it out. Yields are near the upper end of what is expected in the south of England – around 5%.

Many of us have received marketing material from developers in Liverpool or Newcastle promising 8% returns on their latest developments. But not for me.

The thing is, buy-to-let has its challenges. First of all, in the current interest rate climate, I can get tired of my sizable mortgage payments. Plus, I have to worry about the vacancy – the time when I don’t have a tenant. This can be costly.

Shares give me more flexibility. I can buy and sell in minutes and I can find greater results than what is offered in the housing market. Of course, there are risks and buy-to-let has its advantages. For one, housing has, historically, offered more stability in terms of value. The general trend in house prices is upward.

So, investing in stocks is my choice over housing.

Now or later?

If I had £5,000 to invest, I could target a stock with an aggregate 6.5% dividend yield in the current market. That would give me £325 a year. That’s a good return, and I can also hope for an upward movement in the share price.

I can also use compound generating strategies. This is the process of earning interest on my interest by reinvesting the dividends every year. The longer I leave, the more money I will give. Of course, this only makes sense if I don’t need passive income right now.

After 10 years of reinvesting 6.5% returns, I almost doubled my original £5,000 – without considering share price growth. So, I can make at least £650 a year.

But compounds produce the best results over a longer period of time. After 30 years, I will have £35,000 – without taking into account share price growth. From this, I can generate at least £2,275 per year.

However, as noted, this does not include share price growth. And it is important to remember that FTSE 100 today it is about four times larger than it was 30 years ago. So, £35,000 could theoretically be worth around £140,000, based on previous index performance – enough to generate a £9,200 annual return on a 6.5% average portfolio.

There are a lot of variables here. However, in general, this strategy will allow me to increase my return by investing in the long term.

For this strategy to work, I need to invest in stocks with sustainable returns and companies that won’t lose. I will choose the bank like Lloyds and financial services giants like Legal & General. The former offers a yield of 4% – due to increase in the coming years – and the latter yields 7.25%.