Mathematically, earning a £6,515 annual second income with £100 a month requires 30 years and a 6.5% annual return. Is that achievable?
The time question will vary from one investor to another. But the rate of return stocks offer doesn’t care about how old you are.
How much can you earn?
Everyone’s investment outcome is a function of two things. One is the amount they invest and the other is the return they manage to achieve.
The way to speed up the journey to a £6,515 second income isn’t by looking for higher dividend yields. They’re available, but can often be incredibly risky.
When a company’s shares trade with a 9% dividend yield, it can be a sign of trouble. This can take the form of excess debt, increased competition, or a declining market.
There is, however, something investors can do to speed the process along. And for those who achieve a positive return over time (which isn’t guaranteed), more money in means more money out.
Investing £200 a month at 6.5% creates a £6,515 second income within 22 years. And after 30 years, it gets to £13,030.
The importance of being consistent
Over the course of 20 or 30 years, stock market headlines will say all sorts of things. There’ll be doom, euphoria, and everything between.
This will make share prices go up and down. And there’s pretty much nothing you can do about this as an investor.
The key to investing well is to focus on what you can control. And that means being consistent every month.
Whether it’s £100, £200, or another amount, the important thing is to stick with it… each and every month, regardless of what the headlines are saying.
In the short term, that can feel like a mistake. But over time, that kind of consistency can be hugely valuable.
Real estate investment trusts
I think real estate investment trusts (REITs) are worth a look for income investors. And one with a 6.5% dividend yield is LondonMetric Property (LSE:LMP).
It operates in an area of the industry where demand is extremely strong. This is especially true of urban logistics warehouses.
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This can attract competition. And with Amazon – a firm with its own warehouses – as a key tenant, investors should be wary of risks.
There are, however, two key reasons for optimism. The first is that leases are long and this means income should be secure for some time.
The second is that physical space limits expansion. So it’s not easy to bring new supply online and start competing with the firm’s assets.
The road to £6,515
Investing regularly over time is the best way for investors to build a second income. And this is really good news for most investors.
Warren Buffett says it doesn’t take a huge IQ to be a good investor. He’s right – what it takes is the ability to be consistent over decades.
That’s not a matter of intelligence – it’s a matter of patience. Whether or not investors have the ability to do that is a question for individuals.
For those looking to get started, I think LondonMetric Property is one to consider. And over time, I think more will show up if we’re watching for them.
Should you invest £5,000 in LondonMetric Property Plc right now?
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Stephen Wright owns shares in Amazon.
