I’ve been investing in stocks and shares since 1986-87, when I was a fresher at university. Starting out with almost nothing, my goal was to turn my tiny income into a big pot of capital. Hence, over the past 35 years or so, my wife and I have been building up our shareholdings. But now it’s time to think about turning this extra capital into a second income.
Four forms of second income
As a freelancer, the easiest way for me to generate a second income would be to take on more clients. But the problem with this earned income is it stops when I stop working. Hence, I prefer passive income — earnings I get without extra work or effort.
Alternatively, I could deposit a lump sum and collect the savings interest from this pot. But even top savings accounts only pay around 3.5% a year on deposits. And I know few people who got rich saving in cash.
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My third option might be to buy government and corporate bonds. These debt securities pay a fixed rate of interest and then return my capital when they mature. For example, a six-month US Treasury bond pays a fixed rate of 5.13% a year (and is one of the safest investments around).
But buying bonds as a retail investor can be awkward and complicated — and some brokers simply won’t let me do this. But if I were a safety-first investor looking for low-risk products, high-quality bonds would absolutely be on my radar today.
A fourth option would be to buy an investment property by putting down a deposit and getting a buy-to-let mortgage. I could then let this house out to tenants and profit from the net income after expenses. But I really don’t fancy being a landlord, especially after hearing horror stories from friends in this field.
My #1 choice for lifelong passive income
My favourite route for generating income from capital is by buying dividend-paying shares. But company dividends aren’t guaranteed, so these cash payouts can be cut or cancelled at any time. In order to reduce the risks, I spread my pot across a wide range of companies and sectors.
In my view, the UK’s elite FTSE 100 index is packed with quality businesses whose shares are undervalued and also pay decent dividends. So my wife and I have been investing heavily in these cheap stocks. As well as dividend income, we aim to make long-term capital gains from selling shares at a profit.
When I examine the Footsie today, I see a wide range of bargain buys in sectors such as asset management and insurance, banking, oil and gas, mining, telecoms, and more. In some cases, dividend yields from these stocks can exceed 7% a year, and at least 20 Footsie share pay 5%+ a year in cash.
But is it realistic for me to generate a substantial second income just by relying on blue-chip UK shares? I believe it is, given that FTSE 100 firms are forecast to pay out a record £85.8bn in dividends in 2023 alone. Wow!
In summary, based on our current progress, we expect to have this new passive income up and running in the second half of this year. So watch this space.
