How I’d invest £20k in this FTSE 100 stock, to build a £10k annual income

What’s the best way to lock in a lifelong second income? For me, it’s high-dividend FTSE 100 stocks, plus the benefit of time.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Passive income text with pin graph chart on business table

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

M&G (LSE: MNG) offers one of the biggest dividend yields on the FTSE 100 right now. Forecasts suggest the investment mangement firm is set to deliver a whopping 10% this year.

Never mind beating the interest from a Cash ISA, it’s enough to beat inflation. And that’s saying something in 2023.

The big yield is partly due to M&G share price weakness. It’s done a good bit better than many in the financial services sector. But we’re still looking at a 15% fall in the past five years.

Should you invest £1,000 in JD Sports right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if JD Sports made the list?

See the 6 stocks

Created with Highcharts 11.4.3M&g Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Passive income

To build long-term passive income, I can’t think of anything better than high-yield shares, held for decades in a Stocks and Shares ISA.

Investing for a long time is far more effective than trying to time the market. But if we manage to buy when the share price is down, that’s a bonus. It means we can lock in higher effective dividend yields for as long as we hold the shares we buy.

So how could I build up a nice income stream from M&G shares?

Danger

Firstly, I must sound a note of caution. Would I really put a whole £20,000 ISA allowance in only one stock? Well, I would if it was a modest part of my entire wealth, and I already had a diversified set of stocks.

There are around 2,000 ISA millionaires in the UK now. One year’s allowance for them is only a small part of their cash.

I’ve known people in the past who put almost all their money into one stock, and then saw it crash. That was painful, even just watching them.

Dividend forecasts

Dividends are far from assured. M&G is unlikely to cover the cash by earnings this year and next, for example. But we’re in a down spell for the asset management business, as people are squeezed by inflation and interest rates.

In the long term, I think it’s a cash cow business. So I’d hope to keep getting good dividends in the decades ahead.

And future dividend ups and downs gives us another good reason to diversify. So, saying that, how could I snag some solid income from M&G shares, just as an example of what might be possible?

A £100k pot

To pocket £10,000 per year from a 10% dividend yield, well, that calculation isn’t too hard. I’d need a pot of £100,000.

How long might it take to build up that much? Suppose I plonk down my £20,000 now, and I keep on getting my 10% per year every year. And I don’t take the income yet, but I use it to buy more M&G shares.

It should take me 17 years at that rate to break through the £100k level. That’s a single £20k investment, with dividends reinvested, and not a penny of extra cash added. And it could multiply fivefold in 17 years.

Inspiration?

This does assume constant dividends, and a share price that stays the same. In the real world, those won’t happen. I could even lose money if my stocks underperform.

But do I find it inspirational to see how much I could earn by investing in high-yield dividend stocks for the long term? I really do.

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »