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UK shares offer some of the highest dividends in the world. These payments to shareholders can serve as a second source of income during recessions and other economic downturns.
In fact, this is one of the reasons why FTSE 100 up 3% over the past year while comparable stock indexes like the U.S S&P 500 down 13%.
The hard times look set to continue. Here’s how I invested £200 a month in UK stocks to earn a double yearly income of £41,257.
The first step is important
The first part of building a second income is saving the initial capital. For example, I can save £200 a month on a regular basis.
| savings | |
| 1 year | £2,400 |
| 5 years | £12,000 |
| 10 years | £24,000 |
| 20 years | £48,000 |
| 30 years | £72,000 |
So I can see how savings build enough wealth for the long term, but this amount can be increased through smart and risky investments.
Why investing is so effective
The historical FTSE 100 yield is around 7.8% (reinvesting all dividends). So let’s see what happens if I invest my savings, assuming a 7% return.
| savings | ||
| 0% | 7% | |
| 1 year | £2,400 | £2,476 |
| 5 years | £12,000 | £14,239 |
| 10 years | £24,000 | £34,210 |
| 20 years | £48,000 | £101,507 |
| 30 years | £72,000 | £233,890 |
Now it becomes clear how much impact these investments will have in the long run. The 30-year figure is more than three times higher with a 7% return on investment!
But 7% is still conservative. Many individual companies offer dividend yields higher than 7%, and investing in the right companies can increase that yield. Let’s see what 10% return will do for me.
| savings | |||
| 0% | 7% | 10% | |
| 1 year | £2,400 | £2,476 | £2,508 |
| 5 years | £12,000 | £14,239 | £15,312 |
| 10 years | £24,000 | £34,210 | £39,973 |
| 20 years | £48,000 | £101,507 | £143,652 |
| 30 years | £72,000 | £233,890 | £412,569 |
A 10% gain really shows the magic of compound interest over the long term. The 30-year total is now almost six times that of no investment!
Not everything will go smoothly, of course. That 10% return looks great over a long period of time, but it’s not easy to remember that in the midst of a stock market crash like the 2008 recession. And again, these returns are not guaranteed.
But as a shorthand for number crunching? I say this figure is quite useful. So let’s see exactly what kind of second income I can get.
How big is the second income?
The size of the second income depends on how much I am comfortable withdrawing. A 4% withdrawal rate, for example, is considered very safe over a long term of 30+ years.
That said, the 4% figure is usually recommended for those who use the investment as a self-sustaining pension. With state or private pensions, or other investments for withdrawal, a withdrawal rate of 7% or 10% is more appropriate.
| Withdrawal % per year | ||||
| savings | 4% | 7% | 10% | |
| 1 year | £2,508 | £100 | £176 | £251 |
| 5 years | £15,312 | £612 | £1,072 | £1,531 |
| 10 years | £39,973 | £1,599 | £2,798 | £3,997 |
| 20 years | £143,652 | £5,746 | £10,056 | £14,365 |
| 30 years | £412,569 | £16,503 | £28,880 | £41,257 |
It should be noted that inflation will eat into these numbers, so the number will be less in real terms.
Still, it shows that if I invest even £200 a month in the right UK shares, I can make a very good second income.
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