The £100-a-month portfolio that could grow into a lifetime second income
Earning a second income has never been easier in today’s digital economy. From part-time jobs and freelance gigs to selling products online, many routes exist for those looking to boost their monthly cash flow.
But one method that often goes unnoticed is micro-investing – rounding up everyday purchases and putting the spare change to work in the stock market.
Consider this: three small purchases a day, each leaving £1 in change, could add up to roughly £100 a month. Channelled into a well-chosen portfolio of dividend-paying UK shares and reinvested diligently, this could compound into something far more substantial over time.
The power of compounding
With an average dividend yield of 7%, investing £100 every month for 20 years could grow into a portfolio worth around £55,000 (assuming reinvested dividends and average share price growth of 2%).
More importantly, that portfolio could generate roughly £3,850 a year in passive income – equivalent to over £320 a month. And that’s without factoring in any potential dividend increases, which could push the numbers even higher.
However, for the plan to work, an investor must pick the right stocks. Not all dividend-paying companies are reliable, so it’s important to assess their payment track record.
Two stocks I think are currently worth considering for such an income-focused portfolio are Mears Group (LSE: MER) and Mony Group (LSE: MONY).
Undervalued and high-yielding
Mears Group, a social housing and care services provider, offers a dividend yield of 7.2% with a modest payout ratio of 48.7%. Impressively, dividends have grown by 109% year on year and the firm has now logged three consecutive years of increases.
Valuation metrics look appealing – a price-to-earnings (P/E) ratio of just 6.66 and a price-to-sales (P/S) ratio of 0.28 suggest the shares may be undervalued. The return on equity (ROE) is a healthy 25.6%, though margins are on the weaker side, with an operating margin of 6.78% and a net margin of 4.28%.
However, its reliance on government contracts means political or budget changes could reduce revenue, impacting profitability and its ability to maintain dividend payments.
Consistent dividends from a strong business model
Mony Group, the technology firm behind several leading price comparison websites (like MoneySuperMarket and Quidco), has been paying dividends for 18 consecutive years. Its current yield sits at 6.3%, supported by a payout ratio of 81.3% and steady dividend growth of 3.3% year on year.
Financially, it’s well-positioned, with equity of £229.4m, free cash flow of £102.7m, and debt of just £45m. Plus, it has a net margin of 18.66% and its ROE is an impressive 37.18%.
But the price comparison market is fiercely competitive and Mony already pays a hefty dividend, limiting funds available for reinvestment. A drop in consumer spending or loss of market share to a competitor could threaten profits — and hurt the share price.
Still, for an income-focused portfolio, I think the track record speaks for itself.
Building that lifetime second income
A £100-a-month dividend portfolio may not sound like much at first. But through compounding, careful reinvestment, and a focus on quality UK dividend shares, it’s possible to turn small spare-change investments into a significant lifetime second income.
If anything, the key is consistency. The earlier the habit starts, the greater the snowball effect over time and the sooner that second income becomes a reality.
The post The £100-a-month portfolio that could grow into a lifetime second income appeared first on The Motley Fool UK.
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Mark Hartley has positions in Mony Group Plc. The Motley Fool UK has recommended Mony Group Plc. Views expressed on the companies mentioned in this article are those of the writer 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 makes us better investors.
