I think most of us have a dream of being able to not work and live off a second income stream. For an investor like myself, the main way this could become a reality is via the stock market.
With a mix of dividend and growth stocks, regular investing could get me to a point later in life where I could pack in other work. Here’s the strategy in more detail!
Working in reverse
I’m actually going to start at the end and work backwards. My goal would be to make £30k a year by the time I hit 55. This gives me around 20 years to build up my investment pot to hit this target. That £30k might seem low, but remember by this age my overheads and cost of living should be much lower.
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I’m going to assume I’m starting from £0 and make the educated assumption on how much I feel my pot can grow by each year.
For the dividend part of my portfolio, I’m going to use an average dividend yield of 6%. For my growth shares, I’m going to use a share price appreciation of 8% per annum. With my reinvesting of any dividends back to help speed up the compounding process, my overall growth rate should be around 7%.
Here are the numbers
Putting this all together, I’m working towards investing £400 a month in dividend shares and £400 a month in growth stocks. By year 20, my pot could be worth £420k. The following year, I could start trimming some profit from the stocks and enjoying the dividends, with this 7% amounting to £29.4k.
Even though the strategy’s sound, I think the main risk is the timeframe. Planning anything that far into the future is hard. My life could change significantly in that period, meaning I could invest more, or less, depending on life. This could change the period at which I could hit my target.
An example to include
It’s key to think about whether there are stocks that realistically fit my goal. After all, there’s no point having a plan with no way to execute on it!
Fortunately, my assumptions on yields have been conservative for this exact reason.
If I was an investor starting from scratch and wanting to buy a stock with a 6% yield, I’d think about adding IG Group (LSE:IGG). The business provides retail and professional investors with a trading platform for many different assets. The dividend yield is 6.26%. As for the share price, it’s flat over the last year.
I like the stock for the long term as it’s a FinTech that has several years of solid growth behind it. This gives it the ammunition and funds to growth further which, in turn, should lead to higher profitability and dividend payments.
A good case here was the purchase of tastytrade, a US brokerage, back in 2021. This gave IG Group an easy foothold in the large US marketplace. It generated £164m in revenue for the group last year, up 26% versus the previous year.
A risk is that the stock’s influenced by sentiment in the market. Should we see a stock market crash, it could cause investors to stop trading as actively on the platform.
