When used correctly, the stock market can be a terrific tool for generating a chunky second income stream. Obviously, kickstarting a new investment portfolio requires a bit of capital. But it’s not as much money as many believe. In fact, putting aside £10 a day is more than enough to start earning a chunky payout through dividends in the long run.
This stream of new wealth stems from the miracle of compounding returns. And by reinvesting any dividends received in the short term, wealth creation can be accelerated. This snowball effect only gets even more amplified when capitalising on cheap shares – something the UK stock market has ample supply, thanks to the recent bear market that kicked off in late 2021.
Investing £10 a day the right way
Finding a spare £10 out of the everyday budget is relatively easy for most households. But in some cases, individuals will need to make a willing sacrifice for certain discretionary expenses. Putting aside this capital translates into around £300 a month. And it’s possible to have a little extra by storing this money inside a high-interest-bearing savings account until the time to invest arrives.
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Generally, it’s better to let money accumulate into a more meaningful lump sum before putting it to work in the stock market. Why? Because, brokers charge a fee on each transaction that eats into an investor’s profits. And yes, even commission-free platforms have fees usually hidden inside a stock’s bid-ask spread.
But the good news is, £300 is a decent chunk of change. And while saving up this money each month, it gives investors time to hunt down worthwhile investment opportunities.
Capitalising on cheap shares
With countless businesses still recovering from the chaos caused by high inflation, stock prices in the UK are largely trading below their historical average. Even after its recent rally, the FTSE 100 is still trading below its average cyclically adjusted price-to-earnings (CAPE) ratio of 18.5. And it’s a similar story for the FTSE 250 whose CAPE has historically stood at 22.2. For reference, the UK’s flagship indices currently stand at 18.3 and 17.4 respectively.
That suggests there are more bargain-buying opportunities in the FTSE 250 right now. And given the high yields some income stocks are offering, investors may be able to lock in a much nicer payout.
For example, financial services firm TP ICAP Group (LSE:TCAP) is currently rewarding investors with a 6.9% yield. That means for every £300 monthly investment, portfolios would start generating £20.70 in passive income. Investing for 12 months at this rate translates into a second income just shy of £250. But if investors were to reinvest all of this, the passive income potential would grow to £266 in an exponential curve as more time goes by. And after 30 years, it could reach as high as £24,760.
But even this may be conservative since we’re not taking into consideration the extra returns from capital gains. As a business that profits from market volatility, TP ICAP has had little trouble expanding its top line as well as dividend payouts. And with its data analytics division starting to gain traction, this trend could be set to continue.
In other words, investors could enjoy a far larger income stream. However, markets are cyclical, as is this company’s business model. So it’s possible to also end up with less than expected. That’s why diversification still plays a critical role, despite how promising an investment may seem.
