Image source: Getty Images
Buying and holding UK shares for the long term can be a brilliant way to build a second income for retirement. Given time, high-quality FTSE 100 and FTSE 250 stocks can deliver solid returns and generate a high, rising passive income stream.
Investors don’t need a fortune to get started. Even £300 a month could eventually target a second income of more than £45,000 a year, given enough time.
Long-term targets
Let’s imagine an investor starts putting away £300 a month from age 30 until retirement at 67. We’ll assume three other things. They already have £20,000 invested in a Stocks and Shares ISA, they increase contributions by 3% a year to keep up with inflation, and their portfolio grows at an average of 7% a year.
Their cumulative contributions would total £258,227. Over 37 years that money could grow to an impressive £1.13m, of which £875,902 comes from share price growth and reinvested dividends. That shows the power of compounding over decades, as small, regular sums can grow massively over time.
If the investor then withdraws 4% of the portfolio each year, known as the safe withdrawal rate, it would provide a second income of £45,365 annually, without eating into capital.
That original £20,000 plays a bigger role than many might think, having 37 years to grow. If the same investor started with nothing, they’d still end up with a handsome £889,657, but that’s £244,472 less. The first pound invested is the most valuable because it has the longest to grow, so don’t hang about.
NatWest shares offer dividends and growth
I think a long-term UK stock portfolio could reasonably target 7% a year, and possibly more, though there are no guarantees. Investors should ideally hold at least a dozen stocks or more, to spread risk. NatWest Group (LSE: NWG) could be a good starting point.
The banking sector has done really well lately. The NatWest share price has soared 320% over five years and 58% in the past year, with dividends on top. However, I should warn that after such a run, share price growth may slow. No stock climbs in a straight line forever.
NatWest shares are more expensive than they were, although today’s price-to-earnings ratio of 12.7 still looks reasonable, compared with the FTSE 100 average of around 18. There’s dividend income on offer as well as growth. NatWest’s forecast yield is 4.8% next year, rising to 5.2% after that.
All the banks have benefited from higher interest rates, which widen the gap between what they pay savers and charge borrowers. However, interest rates are falling and that could squeeze margins and profits. A wider economic slowdown could also increase debt impairments, as businesses and customer struggle, while a wider stock market crash would hurt. That’s why I wouldn’t buy any stock with less than a five-year horizon, including NatWest.
New investors might drip-feed their contributions, taking advantage of dips, and spread money across a range of stocks with different profiles. Most important of all, they should stick with it. The long-term is when the real money is made in UK shares, and the real income too.
