Here’s how I would invest £5,000 in UK shares to generate a second income | Daily News Byte

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UK stocks have had a mixed 2022. Resource and energy stocks have rallied. But the reality is that many UK-listed stocks are currently trading at a discount.

And while this stock market correction has not been kind to many investors, it has created opportunities.

So, let’s now take a look at why I think investing is a good idea, and how I would like to generate another source of income by investing £5,000 in dividend paying UK shares.

Why invest now?

As a long-term investor, I should not worry too much about fluctuations in share prices. After all, the general trend of markets is upward — in fact, the FTSE 100 It is almost four times larger today than it was 30 years ago.

However, we all want to find the best entry point. And by buying when stocks are low, I can reduce the risk of losing money and help my portfolio grow when the market improves.

However, it is worth noting that some stocks are discounted for a reason. I really have to do my research to find out which companies are meaningfully undervalued.

But now there is another reason why I invest. When stock prices go down, and dividend payments stay the same, the dividend yield goes up.

And the dividend yield is always relative to the price I pay for the stock. So, if the stock price goes up after I buy the stock, it won’t make any difference to the yield I get.

compound return

If I invested £5,000 in stocks yielding an average of 8% today – in which Phoenix Group, straight line, And Close Brothers Group – I will have £400 at the end of a year.

That’s good, but it’s not really life-changing. If I reinvest my dividends every year for a decade, at the end of the decade, I will have £10,500. In turn this will give me just over £800 per year in dividends.

And if I reinvested for 30 years, I would have £55,000 at the end of the period. This will give me a dividend of £4,500 per year.

These calculations are not exhaustive because they do not take into account stock price growth or changes in dividends. But, by applying the compounding compensation strategy, it is clear that I can turn the £5,000 into another source of income.

Naturally, continuous investment in my portfolio during this period will help me increase my ability to generate additional income. After all, the more I put in, the more I can hope for.

Wise choices

Wise choices are important in a compound return strategy. I need to be wary of large dividend yields as they are often unsustainable. Instead, I need to do my research starting with dividend coverage.

A dividend coverage ratio above two is particularly healthy and an indication that the company should have no problem paying its shareholders.

The post Here’s How I’d Invest £5,000 in UK Stocks for a Second Income appeared first on The Motley Fool UK

Further reading

James Fox has holdings in Close Brothers Group, Phoenix Group and Direct Line Insurance. Motley Fool UK has no position in any of the shares mentioned. 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 diverse range of insights is what makes it Better investors than us.

Motley Fool UK 2022

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