Earning a second income could always come in handy – perhaps now more than ever.
One practical method I use to try and earn such an income is investing in shares that can pay me dividends. Not only does that require little effort, it also needs no meaningful upfront capital. From a standing start, here is how I would try to follow this method by putting aside £30 each month.
Saving and investing
At the core of this plan is the idea of putting aside some money every month and investing it in shares. I could simply use whatever I have left over at the end of the month to do this.
But the reason I prefer to set a monthly target is because I think doing that could help my mind stay focussed on the goal, even when other priorities pop up.
I would collect the money in a share-dealing account, or Stocks and Shares ISA. That way, once I had enough saved up and my eye on some shares I wanted to buy, I would be ready to start investing.
Choosing shares to generate a second income
What sort of shares could help me hit my goal? Not all shares pay dividends. Even those that do can stop at any time. So I would diversify my funds across a range of shares.
To pay dividends, a company needs to throw off excess cash. That should be in the future, not the past. That may sound obvious, but a lot of investors fixate on firms’ historical dividends. But such an approach can be misleading. Miner Rio Tinto has a yield of 11%, for example. But with many metal prices falling, I would be surprised if buying the shares today could earn me that yield a couple of years from now.
So I would focus on companies I thought had a good chance of producing steady or growing profits over the long term that could fund dividends.
An example income share
An example of such a share I could own in my portfolio is supermarket chain Sainsbury’s. I expect demand for groceries and online shopping to remain strong for years, or even decades. With its supermarkets and online Argos operations, Sainsbury can benefit from a strong market position. I do not own it, but if I had spare cash to invest I would be happy to buy.
At the moment, Sainsbury shares yield 7.1%. That means for every £100 I invested in the shares, I would hopefully earn just over £7 in dividends each year.
Putting my plan into action
That monthly £30 investment pot adds up to £360 in a year. If I invested that at an average 7.1% yield, I ought to generate just under £26 a year in dividends.
That might not sound like much of a second income, but if I kept saving, I would have another £360 to invest in the second year – while still hopefully earning dividends from the shares I bought with my savings in the first year.
Year after year, my dividend streams would hopefully grow as I kept saving £30 a month. If I compounded my dividends by buying more shares with them instead of taking cash, I could aim to boost my income streams faster.
