Who wouldn’t want to generate a second income stream on top of their main one? The only question is how to go about it.
Almost half of us now have a side hustle, according to analysis by Finder.com, earning on average £872 a month. That’s great, if you have the time and energy, but I know an easier way of building an alternative income stream: by investing in dividend-paying FTSE 100 and FTSE 250 shares.
Generating a passive income from a portfolio shares is a lot less hassle than a hustle. Better still, if you invest in a Stocks and Shares ISA, that income is tax-free. For life.
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.
FTSE 100 stocks offer income and growth
Let’s be ambitious here and try to double that average side hustle income – and earn £1,744 a month. That works out as £20,928 a year. How much would you need in your ISA to generate that?
The answer depends on the dividend income you generate, expressed as the yield.
- With a 4% yield, you’d need £523,200 invested.
- At 5%, the required total falls to £418,560.
- And at 6%, the figure drops to £348,800.
Those sums may look daunting but they’re possible, thanks to the wealth-building effect of the stock market. Especially if you start investing early and stick with it.
Over the last decade, the average Stocks and Shares ISA has grown by an impressive 9.64% a year, with dividends reinvested. That kind of return really compounds over the years.
Let’s say you’re 30 years from retirement. If you invest £200 a month into your ISA, and increase your contribution by 3% a year to keep up with inflation, with that rate of return you’d have an impressive £530,544.
Aviva shares offer dividends and growth
At The Twelfth Magpie, we suggest building wealth by investing in a balanced spread of at least a dozen UK shares. One dividend-paying stock I rate right highly is FTSE 100 insurer and asset manager Aviva (LSE: AV). Its shares have done well lately, rising 76% in the last five years. In practice, investors have got a lot more than that.
Aviva also pays some of the most generous dividends on the blue-chip index. Today, it has an impressive trailing yield of 5.75%. With dividends reinvested, the total five-year return on this stock would be heading towards 110%.
Share price growth isn’t guaranteed and nor are dividends. Investors must accept there will be periods when even the best stocks underperform. Aviva’s shares look a little expensive after their strong run, with a price-to-earnings ratio of 25. As ever, success comes at a price.
Aviva operates in a competitive market and it has to keep battling for new business against rival insurers. If we get a wider stock market crash, that would hit the value of the assets it manages, reducing income.
But short-term volatility is the price you pay for the long-term rewards of investing in equities, and I think Aviva is worth considering today. I’d buy it myself but I already hold two FTSE 100 insurers, Legal & General Group and Standard Life. They pay even more dividend income.
Should you invest £5,000 in Aviva Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aviva Plc made the list?
Harvey Jones owns shares in Legal & General Group and Standard Life.
