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The second income is a prize usually reserved for Wimbledon finalists. But weekend champions aren’t the only ones who can rack up recurring rewards.
While Arthur Fery took the stage at the Central Court, the stock exchange was quietly doing what it had done for four decades: raising money for people who were patient enough to leave it alone.
What can £100 a month become?
Since its establishment in 1984 FTSE100 it produced an average annual total return of approximately 6.9% after dividends were reinvested. Add £100 a month at this rate and the results are as follows:
| Time frame | Portfolio value | Annual second income of 6.9% |
|---|---|---|
| 10 years | 17,214 pounds | 1,188 pounds |
| 20 years | 51,465 pounds | 3,551 pounds |
| 30 years | 119,617 pounds | 8,254 pounds |
It is worth paying attention to a certain regularity here: the third decade adds more than the first two decades combined. This is when the profits really start to take over. Of the £119,617 portfolio, only £36,000 is actual contributions. The rest comes back in the form of dividends and appreciation.
Past performance does not guarantee future returns – if it did, investing would be much easier than it actually is. But the compound interest formula is written in stone.
Why it looks intriguing now
UK shares remain extremely affordable by international standards. Even after the FTSE 100 has breached the 10,000 mark, the index is trading at a forward price-to-earnings (P/E) ratio of around 13.4.
For comparison, about 20 for S&P500. Prices vary in the US market during years of continuous profit growth, but not in the UK.
The two indexes are not the same – the US places a greater emphasis on technology than the UK. Ultimately, however, money is money, regardless of the industry it comes from. That’s why the majority of my stocks and shares ISA is made up of UK listed companies. I think it’s a great place to look for potential opportunities.
Stocks worth considering
The international company Croda‘s (LSE:CRDA) is a name I own that shows what the value looks like. It also has a great track record when it comes to dividends.
This specialty chemicals company boasts mighty dividend growth, with a current yield of nearly 3.7%. This is a lot compared to the average of 1.5% over the last 10 years.
Long-term protection comes from adding Croda products to customers’ formulas. This means that switching involves re-testing and re-validation, so customers rarely churn to save pennies.
The activity in lipids (organic, water-insoluble macromolecules) remains a wildcard. Demand is growing, but the regulatory environment in the US remains hard and poses a source of risk for business in the near future.
Overall, however, the latest results are encouraging. Strong growth in many departments – including ceramides (vital fats) and fragrances – is showing real signs of recovery from cyclical lows.
Buy while it’s affordable?
Croda’s dividend yield isn’t just a signal of passive income. This is also a sign that the shares are extremely affordable – which is why I am continuing to escalate my investment in the company.
Down 70% from 2021 highs, that’s certainly the case. That’s why I think it’s worth considering for investors who want to earn a second income by investing £100 a month.
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Stephen Wright owns shares in Croda International.
