There are plenty of ways to earn an extra income. I could look for part-time work, rent out a spare room, or I can invest in stocks and shares. From personal experience, I believe the latter to be the most financially rewarding and time-efficient.
Why now?
Since the beginning of the year, the FTSE 100 has experienced a slight decline of 0.65%. In contrast, the S&P 500 has surged by 18.2%, and the Dax has risen by 13%. Despite the extreme pessimism surrounding UK stocks, business performance is not necessarily worse.
Certainly, some of the pessimism is understandable, as the UK economy may not appear as dynamic as its peers. However, growth forecasts for the UK are generally comparable to those of the US and Europe. Additionally, it is essential to note that a significant portion of the FTSE 100’s revenues, approximately 70%, comes from overseas.
Numerous analysts believe that UK stocks are currently undervalued, trading at a discount that may not be justified. I share this sentiment and believe that the prevailing negative sentiment towards UK stocks does not accurately reflect their potential for growth and performance.
Creating extra income
Naturally, investing a lump sum during a period of market uncertainty and undervalued stocks can be a strategic move. Not only do undervalued stocks present the potential for share price gains as the market corrects itself, but they often offer attractive dividend yields as well.
When share prices fall, dividend yields tend to increase, making these undervalued or fallen stocks more appealing to income-focused investors. The higher dividend yields can provide a steady stream of income, even during volatile market conditions.
With share prices depressed, there are currently around 60 stocks on the FTSE 350 that offer dividend yields exceeding 6%, which is quite substantial. This represents an opportunity for investors seeking to lock in larger dividend payments from their investments.
Starting with nothing
Today, starting a portfolio with little to no initial capital has become more accessible, thanks to various factors that have democratised investing.
Fractional shares now allow investors to buy fractions of stocks, eliminating the need to purchase whole and previously out-of-reach shares. Additionally, many platforms offer low or no minimum investment requirements and commission-free trading, making it easier to get started with limited capital.
To build my portfolio without starting capital, I’ll need to save regularly. By consistently contributing a portion of my income on a monthly basis, I can steadily grow my portfolio while taking advantage of compounding returns.
If I invest poorly I could lose money, but if I invest well, I could achieve anything from 6%-12% in annualised returns. So, let’s assume I’m put aside £200 per month and expect an annualised return of 10% on my investments.
Leveraging the current market conditions and implementing a compound returns strategy, achieving this target appears quite feasible. Here’s a projection of my portfolio size and passive income potential over the years.
| Portfolio size by stated year | Passive income potential in stated year | |
| Year 5 | £15,487.41 | £1,342.92 |
| Year 10 | £40,969.00 | £3,758.25 |
| Year 20 | £151,873.77 | £14,270.65 |
| Year 30 | £521,097.58 | £42,728.13 |
