I believe it’s entirely possible to create a second income through investing in FTSE stocks.
I’d follow some specific steps to achieve this, which I’ll break down below.
Simple approach
No one likes complications, and I’m the same, especially when it comes to investing. With that in mind, I’ll adopt a simple strategy when it comes to my investment vehicle of choice and stock picking.
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I’ll open a Stocks and Shares ISA. This is because of the favourable tax implications, as well as generous £20K annual allowance.
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.
Next, I’m going to buy stocks in this ISA that I believe are blue chips and industry leaders. Furthermore, I’m going to diversify my pot of stocks as this is a great way to mitigate risk.
Risks for me to consider
As I’m investing in dividend stocks, I must remember that dividends are never guaranteed.
Next, each individual stock comes with its own risks that could dent performance and returns. I need to consider these for all the stocks I decide to buy.
Finally, I’ve got a monetary target and yield in mind. However, if I earn less than my target yield, this will impact how much of additional income I can create.
Quick maths
If I had £15k to spare today, I’d put it all into my ISA with a view to buying dividend stocks. I’m going to follow my plan for 30 years, and aim for an 8% rate of return.
The magic of compounding will help turn my £15k into £462,107 after 30 years. The next step is to draw down 6% annually, and split this into weekly chunks, which equates to £530 per week.
Stock picking
One stock I’d buy if I were following this plan would be Legal & General (LSE: LGEN).
The FTSE 100 financial services powerhouse deals in financial planning and retirement products. As well as vast experience and wide coverage, the business has a good track record of performance and returns. However, I do understand that the past isn’t any form of guarantee of the future.
What I like about Legal & General’s modus operandi is the fact it operates in a burgeoning sector. The demand for retirement and financial planning products is only rising, in line with an ageing population. Furthermore, when consumers invest in such products, they are often long-term products. This can help Legal & General perform well with good earnings visibility.
From a bearish view, economic turbulence can be a worry for a couple of reasons. Firstly, during tougher times, consumers may spend less on non-essential products such as future financial products as they’re battling a cost-of-living crisis. This can hurt performance and payouts. Furthermore, if the economic picture gets really bad, dividends can be cut. Legal did this during the financial crash of 2008.
Moving back to the other side of the coin, Legal & General’s fundamentals look good to me. The cherry on top is a mighty dividend yield of 9% at present. For context, this is higher than my 8% target as outlined above.
