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Using £10,000 to build towards a second income of £500 a month is a realistic goal to aim for. By initially investing in high-growth shares, the value of the investment could appreciate rapidly. Once a goal’s reached, it can be shifted into high-yield dividend shares which pay the required income.
For example, it’s common for a portfolio of growth stocks to achieve annual growth between 8-10%. £10k in this portfolio could grow to £85,000 within 24 years, assuming annual price appreciation of 9%.
Then, the investment could be shifted into a portfolio of dividend shares that achieve a yield of 7%, on average. That would pay out £5,950 a year in dividends.
The right shares
The key part of this plan is to pick the right shares. Some top FTSE 100 growth stocks that could help grow a portfolio include big names such as Games Workshop, 3i Group and London Stock Exchange Group. Some smaller FTSE 250 growth stocks can also help, such as XPS Pensions Group, Hochschild Mining and Premier Foods.
These companies have all enjoyed high and consistent capital growth over the past decade and benefit from reliable revenue streams in strong industries. However, high-growth stocks tend to be more prone to volatile price swings. Therefore, it’s wise to mix a few defensive stocks into a portfolio to maintain stability during rough economic periods. Consumer staples and healthcare stocks tend to have defensive qualities — think Unilever, Tesco and AstraZeneca.
A dividend play
One dividend stock worth considering is Legal & General Group (LSE: LGEN). The prominent UK insurer boasts one of the most reliable dividend track records in the FTSE 100. It has a market-cap of £14.25bn and a dividend yield of 9%, supported by strong cash flows.
Recently, declining revenue has led to a drop in earnings. With expenses and revenue now almost equal, the company’s net margin has dropped to 0.67%. That doesn’t instil much confidence in the company’s direction. Fortunately, it’s already begun working to turn things around, offloading its housebuilding arm and US protection business.
Instead, it’s turned the focus to its retirement and asset management divisions, where it holds £1.1trn in assets under management (AUM). As part of the 2024 final year report, it announced a £500m share buyback programme, further entrenching its commitment to shareholders.
But it isn’t in the clear yet. If earnings don’t improve soon, there’s a risk it may have to cut dividends. It faces further risk from heavy exposure to market fluctuations, interest rate movements and economic cycles — all of which can affect both its investment performance and demand for its financial products.
On top of that, despite its well-established position, the complex regulatory environment in which it operates could impact profitability.
A balanced portfolio
When building a long-term investment strategy, it’s important to understand how different asset classes should be balanced in a portfolio. Even when leaning towards a more growth-focused or income-focused portfolio, it’s important to include a variety of stocks.
A truly diversified portfolio should include stocks from a broad range of industries and a variety of regions, including Europe, Asia and America. This helps protect from downturns in any one specific region or sector.
