Trying to save a specific amount of money each month can sometimes be difficult, as we all earn different amounts. Therefore, it can be easier to try and save a percentage of a salary (like 15%).
I’m going to use the average UK salary (£27,750) from last year to benchmark potential second income. However, by sticking to the same percentage, investors can easily adjust the monetary figure to them specifically.
Getting from X to Y
I’m no tax expert, so I’m going to use pre-tax figures. Some 15% of the annual salary would amount to £4,162, or around £347 a month. That may be a tough call, I know. But I believe it’ll be worth it in the end.
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To make my calculations slightly easier, I’m going to modestly round the figure up to £350. This then goes into dividend stocks to help my money work harder and to start generating this second form of income. In order to make £6k annually from this pot, I’m going to have to spend quite a few years growing it. Some might think this will take many decades before the goal is reached, yet this isn’t the case.
Rather, sticking to investing £350 a month and achieving a 6% average dividend yield on the portfolio, it’ll take 15 years to reach the target. From this point onwards, dividends don’t have to be reinvested to grow the investment pot. Instead, £500 (on average) of dividend income could be enjoyed each month without selling any of the existing shares.
Achieving the 6% yield
One of the key points my strategy hinges on is the ability to achieve a 6% average dividend yield. I accept this is higher than the average for both the FTSE 100 and FTSE 250. Yet when I consider certain stocks that I feel would make up the portfolio, it isn’t unrealistic.
Investors could consider including Glencore, NatWest Group, Aviva and Imperial Brands. The blended yield of these four ideas is currently 6.6%. So the 6% figure isn’t something I feel is unachievable, even holding a multitude of stocks.
One risk worth mentioning is changing yields over time. When dividend income is received, it needs to be reinvested to allow the pot to compound and grow. Yet there’s no guarantee that when reinvesting, the yield will be the same. It could be higher, it could be lower but, ultimately, it’s an unknown.
Numbers change, strategy doesn’t
Changing the percentage of salary invested naturally will change the long-term amount of income that can be generated. Even though having a specific figure in mind is great to be goal-orientated, it’s irrelevant if the strategy doesn’t work.
I feel the process of buying and reinvesting dividends from income payers is a sound strategy that can be use to build an investment pot and reap a second income further down the line.
