If I had known much earlier in life that investing regularly today could help me build a second income stream for tomorrow, I’d have started much sooner.
It’s still possible to start today, in my view. Let me break down how I’d approach it.
Rules of the game
Let’s say I have a £15K lump sum to invest today. I’m also going to invest £250 per month from my wages too. I save and invest each month anyway, so this is doable.
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First, I need to pick an investment vehicle. I reckon a Stocks and Shares ISA is a no-brainer as I wouldn’t need to pay tax on dividends I received. Dividends are key to building my pot up.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The other thing is to ensure I pick the correct stocks, for the best chances of maximising my returns. I’m going to aim for the best dividend-paying stocks. I’m looking for established businesses, with good track records of returns, as well as solid future prospects. I reckon 5-10 stocks should work for me.
Let’s crunch some numbers. Investing a £15K lump sum, and adding £250 per month for 25 years, aiming for a return of 8%, the magic of compounding would leave me with £347,859.
I’d then draw down 6%, leaving me with £20,871. As a weekly figure, that translates into £401.
However, there are risks to note. Firstly, I must remember that dividends are never guaranteed. I might end up with a lower rate of return, therefore decreasing my final pot. Plus, all stocks come with individual risks I must consider too.
One stock I’d buy
If I was undertaking this plan today, Foresight Solar Fund (LSE: FSFL) is the type of stock I’d love to buy to help me maximise returns.
As the name suggests, the business invests in solar assets, with coverage across the UK, Spain, and Australia.
The firm’s assets generate clean electricity, which is then sold to energy companies. At present, the emphasis on clean energy, and moving away from traditional fossil fuels, is huge. This is only set to ramp up, in my view. Foresight could be in a great position to capitalise and deliver excellent shareholder returns.
At present, Foresight shares offer a dividend yield of 8.8%, which is higher than my aim of an 8% rate of return. Plus, the business has hiked dividends for the past nine years in a row. However, I do understand that past performance isn’t necessarily an indicator of future events.
From a bearish view, Foresight has a fair amount of debt on its balance sheet. This could hinder payout levels moving forward. The bigger issue for me is the difficulty surrounding new solar farms. The complexity around regulation involved with land for such farms, as well as high expenditure, make me wonder if growth and consistent returns will be easy to achieve.
To summarise, Foresight ticks the boxes I’d look for in a stock I’d buy to help me build an additional income stream.
