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Building a second income from the stock market takes time and discipline, but the rewards can be life-changing. Or at least, retirement-changing. I think it’s entirely realistic to aim for a passive income £15,000 a year, by drip-feeding £300 a month into a spread of shares.
That target equates to £1,250 a month, enough to make a real difference in later life. The usual rule of thumb says to withdraw no more than 4% a year from a portfolio to reduce the risk of running out of money. A pot of around £375,000 is required to generate my £15,000 annual income.
Someone investing £300 a month over 30 years in a basket of FTSE 100 shares that delivers an average total return of 7% a year, would build a pot of £363,862. That’s just shy of the £375,000 mark. Contributing a little extra, investing a lump sum along the way, or beating that 7% return could easily bridge the gap. The real power lies in compounding, with reinvested dividends steadily magnifying long-term returns. It’s how patient investors can build substantial wealth over decades.
FTSE 100 shares
Personally, I’m building a diversified portfolio of FTSE 100 and FTSE 250 shares that blend growth with dividends. I typically hold between 15 to 20 stocks in different industries I believe in.
Oil and gas giant BP (LSE: BP) is one of the most generous dividend payers today, with a trailing yield of 5.7%. On top of that, BP is returning more cash to shareholders through share buybacks, which shrink the number of shares in circulation and increase the value of those that remain. Over the last year, the stock has climbed just 3%, but it’s shown encouraging signs of recovery lately, jumping 15% in the last three months.
BP has a big dividend
At first glance, BP’s price-to-earnings ratio of 238 looks astronomical. That’s because earnings per share collapsed by 97% in 2024, from $5.27 to just $0.14 per share, as oil prices fell. And that’s something the board has zero control over. BP can reward investors handsomely during strong commodity markets, but it suffers when prices retreat.
There’s also a longer-term challenge. Talk of an oil glut is gathering pace, which would weigh on the share price, and the global transition towards renewables remains a serious threat. BP recently decided to row back on its green energy plans, doubling down on oil and gas. That leaves the business exposed to future policy and demand shifts. I still think long-term investors might consider buying, but it won’t be the right fit for everyone.
Invest with discipline
The lesson here is not to rely on a single stock, however tempting the dividend may look. Holding a range of businesses in different sectors spreads the risk and ensures no single industry dominates. Reinvesting income, drip-feeding contributions through good times and bad, and staying disciplined during bouts of market volatility are what count.
Investing £300 a month for three decades is no small commitment. Yet, over time, it could build a portfolio capable of delivering a handy second income, thanks to the miracle of compound returns.
