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Those looking for a second income could consider investing in the UK stock market. That’s because 311 out of the largest 350 listed companies have paid a dividend over the past 12 months.
Of course, there’s no guarantee this will be repeated. But without a crystal ball, history’s all we’ve got to guide us.
Possible returns
Of the UK’s 100 biggest stocks, only one didn’t make a dividend payment during the past year.
Overall, the yield on the FTSE 100 is 3.58%. A return like this means a £20,000 investment (the most that can be invested in a Stocks and Shares ISA each year) would give a second income of £716 a year. This beats most instant-access savings accounts but it’s not a life-changing sum.
Investing the same amount in the highest-yielding (8.38%) stock on the index, savings and investment company M&G (LSE:MNG) could pay £1,676 a year. As impressive as this might be, I don’t think it’s enough to give up work.
Long-term investing
The most recent data from the Office for National Statistics reveals that the average UK full-time salary is £37,430.
To generate a similar level of income from shares, a large investment pot is needed. For example, investing £20,000 for 57 years — with an annual return of 8.38% — would grow to £1,963,954. This assumes all dividends are reinvested buying more shares, a process known as compounding.
This could then provide a second income of £164,579, which would be more than the average salary of £152,925, assuming wages grow by 2.5% a year.
Therefore, in theory, it’s possible to use the stock market to match the average UK salary. But it would take a long time, and there are no guarantees.
However, it must be pointed out that it’s not a good idea to have just one stock in a portfolio. Also, a return of over 8% is exceptional and some would suggest it’s unlikely to be maintained over a sustained period.
Flying under the radar
However, M&G appears to be in good shape, despite being a relatively unknown company. When it first came on my radar, I was surprised to learn that it’s been around since 1848. It was separated from Prudential in 2019 and now has 5.1m retail customers and 800 pension funds and insurance companies on its books.
In 2024, it reported a 5% increase in adjusted operating profit. Over the next three financial years, it plans to increase this by 5% a year.
And its balance sheet remains healthy. The group has a Solvency II ratio of 223%, which is more than twice the minimum amount required by legislation.
The company has a “progressive” dividend policy which sounds to me like it plans to increase its payout year-on-year. For 2024, it was increased by 2% meaning it’s now 10.3% higher than the amount declared for 2020.
But there are a few things that could affect its ability to keep paying such a generous dividend. For example, turbulent markets could affect its earnings. At 31 December 2024, its accounts disclosed £69.8bn of debt securities, £64.9bn of equities and £14.4bn of investment properties. And it operates in a highly competitive sector.
However, on balance, those looking to generate significant levels of passive income, conscious of the risks associated with high-yielding shares, could consider including M&G in a well-diversified portfolio.
