Building a second income is heavily factored into the decisions I make when it comes to investing, and this won’t change as we enter 2024 and beyond. The plan is to reinvest the passive income I generate, and benefit from compounding. This means I’ll be making gains on the interest I earn as well as my initial investment.
Contrary to common belief, I don’t need a lot of money to build a sizeable nest egg. The average person in the UK saves somewhere between £100 and £200 a month. If I were to invest an amount similar to this, over time, I could be sitting on a handsome pile of cash.
Here are the steps I’m taking in 2024.
Decaying cash
The last few years have seen inflation run rampant. And this is a pertinent reminder of how leaving my cash in the bank will see its value dwindle. A 5% inflation rate means prices double after 14 years. At times in the last few years, inflation has reached over 11%.
While some savings accounts are offering generous interest rates at the moment, I’d opt to put my money elsewhere. By letting my cash sit stagnant, I’m missing out on growth opportunities.
My plan
So, from the above, it’s fairly obvious that leaving my cash in a savings account isn’t the way to go. But what should I do then?
Well, I’m sticking to my current investment strategy. That’s to invest in the stock market and buy high-quality shares with sizeable dividend yields. As a benchmark, I like to purchase companies that yield more than the FTSE 100 average of around 4%.
One example of this is Lloyds (LSE: LLOY). It’s a stock I own. And with any spare cash I have, I fully intend to continue adding to my position in the future.
As I write, it offers investors a yield of 5.5%, comfortably above the Footsie average. And while dividends are never guaranteed, with three times coverage by earnings, I’m confident Lloyds will pay out.
On top of that, with a trailing price-to-earnings ratio of just five, the stock also looks cheap. Additionally, its price-to-book ratio, which measures a stock’s price relative to the value of its assets, is just over 0.6.
I’m also a fan of Lloyds because of the moves the business is making for its future. This can predominantly be seen through its recent £3bn strategic investment into driving revenue growth through boosting drivers such as its digital capabilities.
As with any investment, there are risks. Lloyds’ UK focus makes it more vulnerable to a downturn in the domestic economy compared to its peers. Many predict the UK may not see growth for a few years. And where a host of its peers have international operations, Lloyds doesn’t. To add to that, its position as the UK’s largest mortgage lender and the volatility we’ve seen in the housing market may cause further issues.
However, I’m bullish on the long-term outlook for Lloyds. And with its share price at 46p, I see room for growth. As we head into the new year, its these sorts of companies that I’ll be investing in.
