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Contrary to popular belief, investing in UK shares to create a second income does not require a significant monthly contribution if the investor is consistent. With just £200 a month, it is possible to set an investment portfolio on track to passively distribute £20,570 each year.
What’s more, thanks to the stock market correction in 2022, many top stocks FTSE 250 Trading at attractive discounts. And buying high-quality businesses for less than their intrinsic value is a proven recipe for long-term success.
buy quality shares for long term
The stock market as a whole has a perfect track record of recovering from even the worst of financial disasters. However, this does not mean that all listed businesses are bound to return. In fact, weak financials and poor leadership have caused many UK stocks, including large-caps, to collapse over the years.
Even if a firm is financially strong and has been able to recover, it does not mean that it will deliver market beating or even market meeting returns in the long term. After all, businesses don’t exist in a vacuum. There are constant threats from competitors trying to steal customers and, in turn, market share. So how does a company protect itself?
There are many strategies available. However, the most sustainable strategy is to develop a broad economic moat. This involves establishing a collection of unique benefits. These can be leveraged to retain existing customers while a rival firm launches a strike on the addressable market.
Benefits can come in many forms. They can be as simple as a well-known brand, or as complex as network effects or a regulatory barrier to entry. Providing competitors can’t replicate the same benefits, disrupting a business with a wide moat can be incredibly difficult. And for shareholders, it could result in impressive share price and potentially decades of dividend growth.
Convert £200 per month to £20,570
Since the FTSE 250 was launched in 1992, the index has delivered an average annual return of 10.6%. Thanks to compounding, at this rate of return for 30 years a £200 investment in these UK shares could potentially reach a value of £514,264. Adhering to the 4% withdrawal rule, this translates into a second passive income of over £20,570 per year.
Not bad considering the small amount of effort involved. And this income can be further increased through individual stock picking. Even if a portfolio returns just 1% extra, this is enough to boost annual income by £5,020.
Of course, this is all theoretical. There is no guarantee that the FTSE 250 will continue to deliver this rate of return going forward. It goes without saying that stock picking comes with its own set of risks, which can destroy wealth rather than create it. And don’t forget that even stock market downturns and corrections get in the way sometimes. That said, those corrections give us an opportunity to buy quality stocks when they’re temporarily cheap.
This is all to say that investing in UK shares can be risky, but when executed with diligence and patience, it can potentially unlock impressive amounts of wealth.
The post How I would invest £200 a month in UK shares to target £20,570 in second income appeared first on The Motley Fool UK.
The views expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights makes us better investors.
Motley Fool UK 2023