What does £50 get us these days? A night out, and probably only a cheap one? Or maybe we could use it to build a second income for later life.
For me, I’d use the cash to buy shares that pay dividends.
Now, it’s no good just turning up at the bank with my £50 and asking for some shares. Well, my ISA provider would do it, but the fixed £12 charge I pay would be a big overhead for such a small amount.
Saving some cash
Most providers will let us save as little as £25 a week though, so we can build enough for a cost-effective purchase.
My minimum would be £500, I think. And if I started now, I could be buying my first shares in as little as 10 weeks.
Who needs to be seriously well-heeled to think about investing in the stock market? Not me.
The tricky part
But then, we have to decide what to buy. Starting out, I’d narrow it down to well-known FTSE 100 companies that pay dividends. So let’s see which stock I have my eye on for my next Stocks and Shares ISA buy.
It’s Legal & General (LSE: LGEN), and it offers a forecast dividend yield of 8%. Like others in the insurance sector, and finance in general, a low share price is helping keep the dividend yield up.
How much money might I accumulate?
Accumulating cash
Well, £50 a week is £2,600 a year. In my first year, I’d buy a different stock every time I had £500. That’s because diversification would be my absolute number-one priority in my first year.
Reducing trading costs can wait, as lowering my chances of a sector wipeout are paramount. I’d go for five stocks in five sectors.
But to make the sums easier here, let’s just work out what the whole lot invested in Legal & General might get me. It would be the same as a diversified portfolio with the same overall average yield, so it’s still a calculation worth doing.
Dividends compounded
Now, dividends aren’t guaranteed. And that’s another reason to diversify among stocks paying dividends. Vodafone is halving its dividend next year, for example. But someone holding it in a 10-stock portfolio would suffer only 10% of the pain.
In 15 years, 8% a year could compound to a pot of £73,600 if I reinvest all my dividends.
And 8% from that could then pay nearly £5,900 a year. That much as a second income should come in very handy — and all paid for by forfeiting a night out a week.
Long-term returns
Returns like this aren’t 100% certain, and share prices will move up and down. But in the past decade, Stocks and Shares ISA returns have averaged 9.6% a year.
So whatever return I actually achieve, I think I could bag something decent. And I should be in better health too, with all the beer I’d avoid drinking!
This post was originally published on Motley Fool
